Sinn Fein haven't explained yet how they would balance the books with wealth tax
Published 10/06/2014 | 02:30
The Government faces an acute communication problem which the opposition will have no trouble exploiting. After excessively trumpeting their own success in exiting the funded portion of the EU/IMF adjustment programme, the Government had begun to slip in its focus even before the last Budget.
The last six months have seen momentum-sapping scandal after momentum-sapping scandal. Now the Government has to deliver another Budget potentially laced with austerity to a public it itself has primed for no more cuts. Solving this problem will take the kind of skill we haven't yet seen from the government partners, as in the past the troika and Fianna Fail could be blamed for everything.
Labour's recent electoral drubbing and the ensuing leadership race has somewhat overshadowed the rise of Sinn Fein and the Independents as serious political forces at local level. Irish politics being what it is, the local city and county councils will provide a series of petri dishes for how our national politics may be reshaped after the next election. We will get to see just how the new councillors deal with real policy issues at the local level, and that will be instructive.
The local and European elections established one concrete fact about Sinn Fein: they are a major electoral force now and, in fact, represent the only alternative set of policies likely to gain power in the next election. These policies deserve to be taken seriously.
Any coalition of Fianna Fail, Fine Gael, Labour, or Independents can be expected to continue with business as usual, that is, broadly progressive income tax policies, which help the poor; and broadly regressive consumption tax policies, which hurt the poor, plus nods at increases in the new anti-cyclical property, carbon, and water taxes.
Would, or could, a government with Sinn Fein at its core do things differently when it comes to tax?
Well, one place to look is the policy document the party puts forth on economic policy. In fairness, these policy documents are light on detail and strong on bullet points.
Remember Fine Gael's five-point plan? Yeah, me neither.
An aside: one key reform which would improve policy making in this country immensely would be a budgeting office within the Oireachtas to cost individual policies and programmes offered by parties, or a sub-section of the ESRI dedicated to this work.
Back to Sinn Fein's policy document. These documents are really only read by wonks like myself, but they do provide a window into how the party sees itself in government. What are the main policy platforms of the party?
First up, we have a series of wealth taxes, introduced in 2012 by the excellent Sinn Fein finance spokesman Pearse Doherty. The signature policy innovation is a 1pc tax on net assets in excess of one million euro, but which doesn't include wealth in the form of business assets, investments or shares in private companies, and which has a raft of other minor exclusions. The usual argument against wealth taxes is they destroy existing jobs and investment and deter future investment, but we've known since the work of Joseph Stiglitz in the late 1960s this argument is rubbish. Wealth taxes are in place all over the world, and a global wealth tax has been mooted by French economist Thomas Piketty.
It should also be noted this wealth tax is also a property tax of sorts, as only the first 20pc of the family home and the ordinary contents of the home are excluded from the calculation of the tax, which doesn't really square with the rhetoric currently being put out by Sinn Fein on refusing to pay the property taxes instituted by the Government.
A huge proportion of the total wealth of the wealthiest in society is bound up in these three categories of business assets, investments or shares in private companies – and so much of the low hanging fruit of the rich that Sinn Fein want to reach might elude them.
There just aren't that many people with hundreds of millions of euro sitting in bank accounts in Ireland, and the risk of capital flight is very real for these people.
According to the Central Bank's latest quarterly financial accounts, household net worth, the value of a household's assets less their liabilities, stood at €490bn, or about €107,000 per person. Obviously some households have a lot more than others, so you don't know how many people would be affected by the wealth tax. Also, household net worth is subject to large changes in size due to changes in valuation.
The likely benefits of the tax to the Exchequer are estimated by Sinn Fain at €800m. And while that's nothing to sniff at, the hole in the public finances is roughly an order of magnitude bigger.
The wealth tax will certainly raise money – but there will be a reaction, and this reaction isn't costed for properly in the Sinn Fein proposal. As I said, this isn't a specific criticism of the Sinn Fein document, but a better modelling of the distributional impact of the tax needs to be done. Part of taking the party seriously means taking these policies through their paces. This shouldn't be done to single out Sinn Fein, however, as all parties should have their policies costed.
The reality is that Ireland is a very unequal place when it comes to income, but probably even more so when it comes to wealth. I say 'probably' because we don't really know how much 'wealth' there is in the country, and the net worth statistics aren't a great guide. When it comes to household income, 62pc earn less than the national average while the top 30pc of households earn more than €70,000 when salaries and welfare payments like child benefit are included. Only 2pc of households earns more than €200,000 a year while 14pc earn more than €100,000. The average household income is around €56,000. Wealth taxes won't hit many households by these measures.
Ireland has two wealth taxes, on property and on pensions, and they generate income for the State, but they also change behaviour. We need more information and better research on these taxes to talk seriously about implementing more of them. Taxing the wealthy might win votes but it's not clear the wealth tax gains are actually there to fund all of the programmes Sinn Fein describe in their policy documents.