In a new Research Technical Paper from the Central Bank, Diarmuid Addison-Smyth and Kieran McQuinn quantify the housing-related windfall revenues in stamp duty and VAT categories at a cumulative €7.5 billion (approximately) over the 2004-2008 period.
6 replies on “The Housing Bubble and the Windfall in the Tax Revenues”
Very useful. This CB estimate is that housing-related windfall revenue hit c. €2 bn pa at peak from VAT and stamp duty alone – CGT left out. But this is just for housing. Windfall revenue from other property must also have been substantial, including CGT which applies rarely to housing. Plus there was windfall revenue through the Bubble under all other headings, including excise, Income Tax, PRSI, VAT, since employment and activity were at abnormal levels. Anyone tried an estimate of total windfall revenues for say 2005, 2006, 2007?
Thanks for posting the above Philip. I think the report by the Central bank is useful and I am sure Colm McCarthy finds it useful also. I know his estimation of €7-8 billion which was in the economy in those days, was pure credit, is a useful point also. Wouldn’t it be interesting, if the billions worth of credit, which was €7-8 billion per annum I guess, was related in some way to the €7.5 billion windfall tax take.
It would appear to back up a point made my Feasta not so long ago, that the Irish government was ‘borrowing’ vicariously through its citizens. In other words, we need to seriously look at our political system and a way by which it is politically acceptable for an Irish government to borrow money for its own projects, without having to go through this merry go round.
If you look at Tony Leddin’s article in the Irish Times: The ECB, banks and Nama – everybody wins except the taxpayer, Leddin describes another merry go round that appears to operate within the Irish economy.
I will leave you with those points to chew upon, but I will also rush through 2 no. other points, which I have been turning around in my head lately. The way I want to explain this is quite simple. I want to identify a couple of commonly known mechanisms in economics, turn them back ways and see how they serve as a useful model to understand how Ireland operates as a company.
Firstly, there is this idea of de-valuation of the currency, in order to de-value loans held by a nation. I know we are in a position in Ireland where we cannot use this mechanism. But lets look at the Celtic Tiger bubble in property. The primary motivation behind the Irish property bubble was to force a massive re-distribution of wealth within the country. Mainly between old money and new money.
Take a person in their sixties who had saved a couple of hundred thousand euros and held that in the form of deposits in our main banking institutions. That said, the same banking institutions were lending away over the odds for property purchases, to people who had very little savings. The net result was that ‘wealth’ held in storage with the banks was de-valued in terms of its buying power enormously.
With the result, that often this hypothetical middle ages person, who held the hundreds of thousands in deposit form with the bank, made a panic striken lunge and switched that money into property – presumably, a safer form of storage – and added further debt to their name, in order to purchase property having put down maybe 50% of the asking price in cash.
This happened wholesale, and it has not been discussed. I warned several people who were about to do this to wait. We need to sort out this somehow. Already people in Dublin are starting to talk excitedly with each other about the value of their homes going back up again. I feel sorry, but we are getting back into the same vicious cycle.
The second point I want to make, arises from listening to Hernando de Soto. He made the point that in third world countries, they aim to progress from a very simple form of tenure – the feudal lord, or which there may only be a dozen in a country or region – to a much more fine grained system, whereby a lot of people ‘own’ something in some shape or form.
It is quite stunning really, if you think about it. Colm McCarthy makes this point about several billion euros of money sloshing around in the Irish economy during the bubble, was pure credit and will not return again. We will have to learn to operate without it. Isn’t it interesting, when you think of what we did with the extra credit we had on tap. We did precisely the opposite of what Hernando De Soto is trying to do in third world countries. We re-invented the feudal lords again for the 21st century.
There is something severly incorrect with a system in a country that produces barons and earls, when it appeared we had so much easy credit. My only inkling is what Greenspan said – the extra funds flooded into the market and the ‘plan’ for the globe was not sized up properly to make use of these funds. What did the banking institutions do? They tried to keep things simple and distribute the funds to about a dozen individuals on this small island of ours, and invented a function, which the dozen or so individuals might execute – property development. It was going back to feudal basics.
This is why the Green movement is so important in my mind. It enables us to extend the plan for the globe, so we can learn what to do with all of the wealth available and use it in some productive manner. The carbon taxation seems like a good idea, if it is counter balanced in the equatorial regions, where tropical forests exist with some form of incentive system to preserve the forestation there.
I agree with Philip Lane’s article in the Irish Times about the need for new taxation forms etc. But his mention of a ‘property tax’ worries me, because it can be done in a very ham fisted way. I suggest we do consult with Feasta on this aspect, as they have identified several ways the property tax can go wrong. Including many ways in which Kenny report of the 70s was difficult to implement. Kenny was not user friendly at all it appears from the local authorities perspective – they could be badly robbed at a few stages in the process. What Feasta seem to have devised is like a Kenny Mark II. I looks quite promising from what I have seen/listened to. I wish they were given the proper means to develop it.
I read in the newspaper today that Warren Buffet has done that ‘major deal’ he has been searching for, for a long time. Namely where to put that big pile of money he had stashed away. It is a non-trivial problem, and one which must have puzzled the man for quite some time. I found this story interesting, because I can compare it to the folly of my former boss, Liam Carroll who wasn’t as successful in finding a store of wealth for his money. Similarly, it could be argued so in the case of Mr. Quinn of Quinn direct. He was advised strongly by several intelligent people, that the insurace investment was a bum deal, but still he persisted.
I don’t quite know what possessed these people at the tail end of the bubble. People worry about the future of Quinn healthcare today, because of Mr. Quinn’s finances, but it is missing the bigger story. Where do these people invest their fortunes? Bearing in mind, time seemed to be in short supply and they didn’t spend a decade or so, like Warren Buffet did, to find just the right deal to make. Indeed, it took the financial meltdown to happen, before Buffet re-focussed his attention on home soil again.
But breaking this down to brass tacks, and going back to the question of the sixty year old with the hundred thousand euro deposit. There is wads and wads of money out there. This is the last thing that the Irish government should have to worry about at the moment, in terms of NAMA and so on. It shouldn’t even have to borrow from the ECB, we have the money in our bank accounts here at home. But that money is looking for a much saver place to go than in BOI or AIB. Most of the recent sales of residential property in Dublin are all about people in older age brackets transferring their money into what they perceive to be a safer, more durable form of wealth storage.
The final thing I will say, is about Japan. I watched a history channel documentary about the Samurai warrior history at the weekend – all ten centuries worth of Japanese history that is. The story of the Samurai is very much inter-twined with the history of economics on the islands of Japan. Which had relatively little influence from the outside for many centuries.
A lot of the activities of the Samurai had to do with the endless cycle of re-distribution of what wealth their existed on the Japanese islands. Similar to what I described above, in the example of how peoples’ deposits in Irish banks were effectively being de-valued by the banks themselves through the use of financial leverage. I believe the reason why Morgan Kelly was so very accurate in his assessment of the Irish property bubble, is because he understands the Japanese experience so well.
I had to laugh, at one point in the documentary there was 46 Samurai who got revenge for their master and then committed Seppuku. There are statues to these fellows now in Japan somewhere. The point is though – it is like the source of all wealth and taxation in Japan – the rice fields. We could think a bit more creatively about what real wealth we have tied up in deposits in our banking institutions in Ireland.
The relationship between those deposits and the property problem could be re-engineered in some more intelligent way, than sixty year olds rushing out to convert their deposits into bricks over the coming years. The fact being, that the deposits are under threat anyways because of the dangers arising out of property. If the property problem isn’t fixed, then the deposits are done for anyway. It is merely stating what is already a fact, to try and group, or interlock the deposits and property together in some way that makes sense for the future.
Otherwise, we are only talking about selling the property back to developers and fund managers, who are only taking out loans to buy those assets anyhow. While we are all talking about setting up a state property company, I wonder are we going far enough?
I mean, there must be some accounting procedure we can do, whereby ownership of the NAMA loans is transferred away from the dozen ‘feudal lords’ the Irish banks created during the bubble, and ownership of all of those assets is retained by the deposit holders going forward. The ‘feudal lords’ continue to operate and manage the assets as was always the case, but the assets are now backing up the deposits. We establish a proper relationship between money on deposit and the NAMA portfolio going forward – so that property lending isn’t being used as it was in the past – as a means to devalue wealth that was stuck in the form of bank deposits.
Brian Lucey has talked at length about deposits being the most protected form of wealth associated with a banking institution. Karl Whelan has talked along those lines also. But I believe, both economists are missing the big picture. That it was deposits, during the property bubble which stood to lose the most, as long as the bubble continued, they were being de-valued. Now that the property bubble has burst, the deposits are probably screwed in any case. It is time that some realism and some common sense was injected into the debate.
Apologises for the lengthy waffle, all the best. B.
Not forgetting to mention, the side benefit of my accounting procedure interlocking of NAMA property loans and existing deposits with the banks. Once you make this opportunity available to depositors – who are going to waste their money on ‘bricks and mortar’ anyway, as a more durable store of their wealth. You also make very attractive conditions for inward flow of deposits into Irish banks from abroad. This in turn de-leverages the balance sheets of the Irish banks, which enables them to offer more favourable terms for lending to Irish business, which in turn improves Ireland’s economic recovery prospects. The whole cycle becomes virtuous.
This is the most virtuous way to make use of the NAMA property loans. Unless, I am missing something really basic, all of the ducks do line up in a neat row. Yes, what I am suggesting is an accountancy implemented socialism, but who cares what you call it. The deposits are already exposed to a way too much risk.