Daniel McConnell: Next big hot potato is property tax of up to €1,000
There's little hope of a property tax being fair and equitable on the already squeezed middle classes, says Daniel McConnell
Can you afford to pay €1,000 a year in a property tax? Well, according to the man charged with designing such a tax, that is what we will, on average, all pay once it is introduced.
Don Thornhill, a career civil servant who describes himself now as a consultant "who advises on strategy and policy to a number of leading Irish organisations" has recently presented his report to Minister Phil Hogan recommending how such a property tax should work.
Politically toxic and highly unpopular, the lack of enthusiasm of either Fine Gael or Labour to discuss the matter is a clear sign of the trepidation that surrounds the idea of lumping the extra burden on the shoulders of the Irish taxpayer, but in particular the "squeezed middle classes".
Phil Hogan's department is saying nothing other than they have received the report and will consider it.
Even Thornhill himself declined to comment on the matter when asked.
So what is going on?
The Government, clearly spooked by the €100 Household Charge debacle earlier this year, is caught in a dilemma.
Unwilling to increase income taxes, as promised in the Programme for Government, its options are limited and Thornhill has long argued that common sense dictates that Ireland should have a property tax.
"It must be remembered that Ireland stands unique in the developed world in that it does not have an annual recurring tax on land or on buildings," Thornhill and Donal de Buitleir wrote in an October 2008 report called: "The Agenda for Tax Reform: Playing to and developing our strengths."
WHY A PROPERTY TAX?
"Proposals for tax reform are potentially unpopular -- this is certainly the case for our proposals for a recurring property tax," Thornhill himself wrote previously.
Advocating such a tax, the duo said in contrast to increasing income tax, which has an adverse impact on people getting back into, or staying in, the workforce, property taxes do not have the same negative impact.
Many of the same points are restated in his new report to Phil Hogan.
"Recurring annual taxes on land and buildings (especially residential) are generally thought to have minimal negative effects on economic performance. This arises because a recurrent tax, particularly on residential, is a fixed sum. It has a zero marginal rate and does not negatively effect decisions on whether or not to seek work or to invest in further education or in business expansion," they wrote.
Thornhill says most of the opposition for property taxes is driven by the lack of opportunity to evade it when a system is up and running.
Essentially, it is a wealth tax, the bigger the house you have the more you will pay.
"A recurring property tax on residences would be very unpopular. This may have something to do with the difficulty of evading a tax on a very visible base and because payment of the tax was traditionally demanded in lump sums," he argued.
"The tax base is also stable and predictable. Another attraction from a government point of view is that recurring taxes on property are difficult to avoid or evade because the tax base is so visible. This last feature may explain their unpopularity," they added.
In January 2010, Thornhill argued that a property tax should be based on a combination of the size and location of a house -- not its market value.
"The tax would be based on a combination of the floor area and a valuation band, which would differ from one district to another. Differences in prices between districts vary less than actual prices themselves," he said.
If such a tax was levied, the Central Bank said it would average out at €1,000 per household raising €1.5bn a year.
But, if the average is €1,000, by definition many people would be paying more than that, while many other would be paying less than that.
The real fear is that once again, the squeezed middle classes -- those who earn between €50,000 and €150,000 a year -- will be hit hardest.
Labour's Anne Ferris said that any suggestion of €1,000 charges on average houses "wouldn't wash" with people and that any tax would have to be fair. "No way could I stand over a charge like that. Maybe it might be that for those living on the hill of Howth, but I mean €200 or €300 for average homes."
Thornhill and De Buitleir recognised the political toxicity of such a tax and referred to softening measures like waivers for the old and the poor could be factored in.
They also sought to recognise the plight of those who had paid high levels of stamp duty during the last decade.
"A variety of transition measures can also be introduced to provide relief for individuals and households who have recently paid large amounts of stamp duty. Income tax credits, deductions or reliefs could also be introduced to address concerns about increasing the overall burden of taxation," they said.
WHY NOT INCOME TAX/STAMP DUTY INCREASES?
Advising against increasing income taxes, Thornhill is pressing the case to Hogan that income taxes affect both job creation and people's ability to spend in the economy."
Lower income taxes increase consumer spending thus stimulating the economy. If income taxes go too high, they become a barrier to consumer spending, but also jobs.
VAT and other consumption taxes are thought to have a less negative impact on economic performance and consumer spending as they do not distort decisions to work or to invest.
In contrast, taxes on property transactions (stamp duties) are highly distortionary -- by for example reducing liquidity in the housing market. The yield is also highly volatile.
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"There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things," Thornhill quoted Niccolo Machiavelli's Prince.
How apt that is.
Following the major fallout of the household debacle, where almost half the population refused or failed to pay on time. Even now, only 60 per cent -- or €97m out of a total estimated €160m -- has been collected.
Coalition tensions were then raised last month when it was reported that Thornhill had called for the property tax to be taken directly from the pay packets of PAYE workers in his report to Hogan.
This approach was one of the key recommendations of a report by Thornhill and Donal de Buitleir in 2008.
Following loud calls of outrage from some within the Labour party, most vocal was party chairman Colm Keaveney, Phil Hogan was forced to deny this would happen.
Fine Gael backbenchers too have their concerns. In particular they are anxious that any property tax will not increase the financial burden on the so-called "coping or squeezed middle classes".
But it was Thornhill himself in 2009, who pointed out the greatest threat to the equity and fairness of a property tax.
"People are naturally afraid of the return of rates because it was so badly administered. Any system that is introduced had better be equitable and had better be simple," he said.
He hit the nail on the head.
The absence of one centralised universal database leaves any new property tax regime vulnerable to charges that certain sectors will be unduly burdened.
A perception has taken hold that the PAYE worker in that middle-income bracket will once again be hammered while the self-employed, the farmer, the immigrant, the working class, the old, the sick will all have means of avoiding the charge.
Given the difficulties of implementing such a property tax a political fudge appears to be under way.
In recent days and weeks, Hogan's department has written to county councils, saying they will be fined if they fail to get the compliance rates up to some sort of a respectable level.
If, say, come the Budget in December, over 80 per cent of people have paid the charge and registered, Hogan could then argue to retain the household charge, albeit at a higher rate, say the €200 or €300 referred to by Anne Ferris above for another year or two, thus kicking the can down the road.
However, the Troika may take issue with any move to delay the targets and commitments it has set for the Government. The key to the household charge was not the fee, but the register which was to be the basis of the property tax.
Following the backlash it suffered earlier in the year, the Government cannot afford any mistakes on the introduction of property tax.
If it does, then Machiavelli's ominous words will be ringing loudly in their ears as they go back before the people.