Monday 29 December 2014

Politicians today should heed the taxing mistakes made in the past

The biggest issue with property tax and water charges is the fear that they could rise

Published 11/05/2014 | 02:30

CLEVER ADVICE: Jean Baptiste Colbert, finance minister to King Louis XIV
CLEVER ADVICE: Jean Baptiste Colbert, finance minister to King Louis XIV

It's a sad fact that too few of our politicians have a thorough grasp of history. Sad for them, that is. Were it not the case, many of them would have a much easier life. Learning from mistakes is a great skill, and in politics one of the biggest mistakes in history is badly designed taxes. They cost George III his American colonies and both Charles I and Louis XVI their heads.

A king who avoided too much tax and kept his head was the latter's grandfather King Louis XIV, who enjoyed the services of a clever finance minister and adviser, Jean Baptiste Colbert. Named after a biblical character who had lost his head and working for a character who severed heads on a whim must have made Colbert sensitive to the consequences of bad advice. The trick in taxing people, he told his monarch, is to get as many feathers from the goose with as little hissing as is possible.

Another great mind was Adam Smith. What he lacked in Colbert's French flair for description, Smith made up for with the Presbyterian practicality of his four "canons" of taxation: Equity, Efficiency, Convenience and Certainty. A tax is equitable when those who enjoy the benefits arising from the resultant spending make a contribution to it and when the burden of a tax relates to the ability to pay. A tax is efficient when it doesn't distort a taxpayer's behaviour, convenient when it is easy to to pay and collect, and a tax possesses the fourth characteristic of certainty when its burden is predictable to the taxpayer. We might throw in a fifth canon based on Colbert's goosefeathers. Giving it a more formal name – of the kind the dour Scot would have preferred – let's call it "political proportionality". This is the idea that the grief suffered by politicians on the doorsteps over a tax should be proportionate to the tax collected.

In terms of equity, it is fair to say that both property taxes and water charges require that users of services finally pay for them. The burden of only businesses paying rates to fund local government was unsustainable. But it is also fair to say that the services provided by local government could be delivered at a much lower cost than is currently the case.

The Government expects €550m in Local Property Tax receipts this year. That's quite a lot of feathers. But the news last week that one local authority alone, Dun Laoghaire, is spending between €32m and €60m on a new library that most Dun Laoghaire residents never asked for and don't seem to want suggests that there is a lot of hissing as well.

A property tax is fine in theory. But as Louis XVI found out to his bloody cost, when people see hard earned taxes being used to build palaces that aren't needed they tend to take a dim view of it.

Nor is taxing something that is not a source of wealth politic advice. As too many homeless families are finding out, weak rental security of tenure in Ireland is one reason why homeownership rates here are higher here than on the continent and why continental property tax logic – "they have it so we should too" – isn't directly transferable. For most our home is where we live, nothing more. And for many it is a source of negative equity. When a business makes a loss it can offset that loss against future profits. The tax code allows that business to alleviate its tax burden due to a loss. Perversely the tax code aggravates a household's tax burden in similar circumstances.

In theory, water charges are equitable. You use it. So you should pay for it. But what if you already have? When first mooted, property taxes and water charges were meant not to raise the tax burden but diversify it and to incentivise better use of resources. Well if they do what it says on the tin, voters should have few issues with them.

The idea that the additional net cost of new user charges and taxes should be zero is a reasonable one, and and found favour with Brian Hayes in April 2012 when he promised a property tax rebate for those who had paid stamp duty. By allowing an amount for children's use, this is partly being done for water charges. But that tax has huge issues in relation to convenience. With water infrastructure still to be fully overhauled and water meters to be installed, the risk that some will be overcharged while others are undercharged – or even the perception that this is happening – is real. The absence of a standing charge also raises an equity issue in that it forces – or is perceived to force – middle income households to bear the cost of smaller users.

But probably the greatest issue with these taxes is their uncertainty. Water charges could rise in future and property taxes will rise if property prices continue to grow. Throw in a broadcasting charge and it isn't hard to see why core retail sales data have fallen for three months in a row during the first quarter.

Applying taxes like property tax that were conceived in the 17th and 18th centuries is questionable. Applying them without heeding the accompanying wisdom of that era even more so. The numeral in their names aside, Louis the XIV and XVI differed in that the former was a tyrant who led France down a blind alley while the latter was a decent- minded reformer. But because he had a better economic adviser, Louis XIV kept his throne and head while Louis XVI's goose was plucked, stuffed and cooked. Politicians, take note.

Marc Coleman presents 'The Marc Coleman Show' each Sunday 9pm on Newstalk 106-108fm

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