I’ve criticised Pat McArdle on a couple of occasions recently so I’m happy to say that this article on tax makes some useful points. In particular, the following points are correct and are simply not being said enough by our economic and political commentators:
Income taxes are both too high and too low. Too high because marginal rates have gone above 50 per cent – Irish people seem to be averse to parting with more than half of their extra euro. Too low because half the population does not pay any tax.
The problem is not just high rates but, critically, the low levels at which they kick in. It is astonishing that a PAYE earner on a lowly €40,000 has a marginal rate of 51 per cent.
From now on, the challenge is to broaden the income tax base not increase the rates.
Perhaps unsurprisingly, there some points of emphasis in the article I’d disagree with. That the 2009 tax yield has fallen below its 2008 level despite tax rate increases is not proof that “we’re into negative Laffer curve territory”. It’s proof we’re in a very severe recession. But yes, the top marginal income tax rates are too high and they could be pushed into Laffer curve territory if we’re not careful.
Moreover, whatever about the upcoming budget, it will be essentially impossible for the government to stabilize the public finances over the next few years without finding extra tax revenue. Hopefully, this can be done, as McArdle recommends, by broadening the income tax base and by implementing some of the revenue-raising recommendations of the Commission on Taxation, such as a property tax. But getting these measures through won’t be made easier by comments such as McArdle’s jibe here that “tax increases are the last resort of a weak Government.”
46 replies on “Income Taxes Too High and Too Low”
i’ve consistently made this point in the whole public vs private debate (which im trying not to drag in here), that with half of the population paying little or no income tax, any tax hikes are going to have to massively involve the lower paid in our society, and that the Unions should at least be honest in who they are ultimately asking to take the burden of keeping pay levels as is (along with cuts in social welfare). I think the real problem is that the lower paid in our economy don’t see this coming.
The state of the public finances is so critical that almost everyone should be able to identify the measures needed to correct matters. On the income front, tax rates must be increased significantly for the better off, the tax base broadened and deepened to improve coverage and marketable assets sold. On expenditure, public sector payroll numbers, wage levels, ancillary expenditure and social welfare must be cut and non-essential capital expenditure postponed. For example, to reduce the €22 billion deficit to €5 billion, taxes would have to be increased by about 25% and expenditure reduced by a similar percentage. Looks simple but acceptablility and economic impact must give pause for thought.
I agree in general with everything said.
However, I am rather astonished by the consensus from Garrett FitzGerald down that “taking people out of the tax net” at the lower end of income distributions was some sort of crazy lazy pandering to the electorate.
I have to accept that it went beyond what was prudent, but I also have to say that I don’t remember anyone making that point at the time. I would defend the instinct that prompted it.
And I find it rather unedifying to see so many relatively high earners saying so sanctimoniously that those at lower levels should be paying more, even though I do accept that there is more than a little truth in it.
(By the way, I would comment more often here if there weren’t commonly dozens of others before me. Such volumes are an index of this site’s well-merited success but in my opinion make the “conversation” impossible. This is true of popular websites in general, not a peculiarity of this one – David McWilliams’ one is even worse – and the “boards” type ones have not succeeded in addressing the problem, while bringing more problems of their own.
I have been saying this for some time, and one stage thought that e-mail discussion lists were superior. They probably are, but who wants more e-mail now ?
Usenet IMHO works much more satisfactorily as a series of discussion fora, but, sadly, is not used for serious purposes as much as it might be.)
@Karl Whelan. You are correct in principle. As is Garret (sorry Fergus) – and I have never said anything nice before about Garret Fitz’s policy thinking. However the problem now is, as with public service pay and conditions, that the Gov’t is forced with a choice whereby it is seen to cause serious harm to lots of people on medium, low or no incomes or it does nothing and let’s nature take its course – with the same result.
In reality many people who pay no income tax have borrowed 100K for 30 years to pay an upfront stamp duty tax. They have paid over the odds for all government, monopoly, licensed services….the higher prices in Ireland is at least partly down to the higher gov’t created costs of doing business here.
So we should not start by raising taxes. We should start by driving through serious productivity reform throughout the economy – or that bit that the government has a say over.
I still believe that the problem in Ireland is not that the government doesn’t have enough revenue but that it has too much and has become addicted to it.
I will stay out of this discussion except to say the following:
Given the role of tax breaks in our downfall I find it extraordinary that in a deep crisis there has been so little media coverage of them, and that the government have been allowed to keep the broadening of the tax base out of discussion. Tax welfare is the weapon of mass financial destruction croy capitalist governments use on their citizens.
People may find this interesting. I particularly like the idea of an economy and economic efficiency audit before any are introduced:
“TASC calls for tax breaks to be cut
The Statement points out that:
•TASC estimates that tax breaks will cost the Government €7.4 billion in 2009
•The Irish tax system provides more tax breaks than other EU members
•Tax breaks disproportionately benefit the better-off, and therefore reinforce economic inequality
TASC recommends that:
•A one-year ‘sunset clause’ (automatic expiry) be attached to all tax breaks
•Tax breaks only be introduced or, in the case of existing tax breaks, continued beyond the sunset clause, if they satisfy an equality and economic efficiency audit presented to the Oireachtas.”
TASC’s Pre-Budget Statement is available for download:
Creating opportunities for employment and avoiding destroying existing employment should be the key objective for tax policy in this budget. For that reason, I think it is important to look at taxation in the context of minimum wage and employers’ prsi and the social welfare rates (because at the moment, for people with children, it is simply not worth working unless you can get a good bit more than minimum wage or can get part of your wage through the black economy).
I would suggest that the way to begin to resolve this is by
– reducing employer PRSI on the first 20000 euros by 4 percent
– reducing the threshold for the basic rate of tax and reducing the basic rate by one point
– leaving minimum wage unchanged
– reducing unemployment benefit and assistance, over 12 months by 12 percent
Remember, households who live in rented accommodation and still have a job have at least 2000 euros extra disposable income than they had last year. Rents have caved and prices for everyday goods have fallen a little.
There should also be allowance made for people who are over-borrowed. This could be done by increasing mortgage interest relief for people who bought their first house between 2004 and 2008. The stamp duty system should also be restructured to give these people some sort of hand to trade up. (The reason for doing this should not particuarly be to get votes, but to ensure these people can cope enough to remain economically active and not to financially collapse.)
Talking about the top rate of tax makes for good copy, but that’s about it. There is going to be very little money to be collected from people earning 100k+ for 2010 and 2011, outside of the public service and institutional employers. High earners whose incomes are based on bonuses and the like will no longer be high earners. Entrepreneurs will reinvest rather than taking profits as income. And unfortunately, higher vat and higher tax will mean that more profits will be taken without being declared and tax being paid.
The big problem I see is that there is very little relationship between marginal and actual rates of tax.
On the high earner front their are still too many tax avoidence methods.
Any government wanting to inflict pain should start here first to get buy in from middle and low earners.
I would also rather see a property tax than any further increases in the marginal rates.
For the middle and lower income earners the levels of tax credits should be reduced. The regular increases in the celtic tiger years were paid for with borrowed money and they are no longer affordable.
This will bring more and more people back into the tax net which will be required. The obvious danger is the poverty traps that will be created.
is there a breakdown of where the €7.4bn of tax breaks are focused? Sounds like an awfully big number, and the Tasc document only lists what tax breaks exist, not how much is “saved” via each one.
No problem with ending tax breaks where they are not economically efficient, but i assume lots of tax breaks are reasonable, productive and fair. As such, im not sure how the TASC submission helps, in that it says “cut tax breaks” but doesn’t say where. It’s a bit like saying “cut expenditure in the budget” but then dont say where, something which the Opposition got called out on quite recently.
There is also no discussion in the Tasc document about the negative impact from the ending of tax breaks (ie increased costs, lower quality product/service etc)
Given Karl Whelan’s and other’s reflex to broaden the tax base – a euphemism for increases taxes on the poor – may I just start by agreeing with Fergus above in finding it unedifying to seize with relish an option that – though economically sensible – is mostly appealing because it is a political path of least resistance.
As I always understood it, indirect taxes are relatively high in Ireland, and suck much of the progressivity out of the system.
Tax breaks do the rest of the sucking, as E43bn points out above.
One particularly large tax break I always like to draw attention to is the lack of income tax payable on imputed rents for homeowners. This represents an enormous subsidy to owner equity, the scale of which I have calculated on the back of my envelope to be in the region of billions – maybe more than what we are likely to achieve through any broadening of the tax base.
Besides subsidising home ownership and the upper middle classes, this goliath tax break
1) pushes up the price of housing, hurting competitiveness
2) leads to a skewed ratio between rents and mortgage repayment costs
3) enhances the inequity of inherited wealth, much of which is concentrated in housing.
“There should also be allowance made for people who are over-borrowed. ”
I can’t agree with this. I scrimped and saved during the boom to be in a position not to have any borrowings when the bust happened. I am not alone in having done this. Why should I bail out people who’ve had two holidays a year, a plasma TV and a newish car in the drive of a house they cannot afford? All of which they’re still paying for? Why should people with mortgages get help giving money to the banks? Get I get excise relief for my smokes and gin habit? I’m overdependent on both…
Debt relief or help has to be equitable and fair, not just to those with the problem, but to those without. If it is not, it is just another tax on prudence.
“the lack of income tax payable on imputed rents for homeowners.”
You are joking, right?
There’s no tax on imputed health either. We should get the healthy to pay more for the benefits of being healthy. The best way to do this would be to charge tax on pensions of those able to work and not on those not able to work after retirement age… this would raise billions, so it must be okay.
1. On indirect taxes, go to page 134 of one of my favourite publications (Statistical Annex of European Economy)
Projected Irish share of indirect taxes in GDP in 2009: 10.6%
EU15 share of indirect taxes in GDP in 2008: 12.6%
So it’s not true that higher indirect tax rates undo the relative progressivity.
2. “Broadening the income tax base” isn’t necessarily a euphemism for raising taxes on the poor. For instance, my tentative proposal in this area
proposed no income tax for those earning under 25k.
And as for “seizing with relish”, nobody is happy to be proposing raising taxes on people with moderate incomes. But, at some point, a combination of arithmetic and political reality will kick in and it will need to happen.
yoganmahew: sorry, I should have been more specific. I am thinking of people who are over-borrowed on property, not those with consumer debt, although that is certainly a big problem for our society (and our banks) as well.
As far as I can see, anybody who bought property between 2005 and 2008 for the first time is in some trouble, even if they aren’t under immediate pressure.
I applaud your prudence. However, the reason for doing it is not out of mercy or compassion or pity or anything else, it’s just that if we don’t , we will leave a big chunk of the population economically inactive and stuck in a trap. If some of these people collapse economically, and have to sell their houses into a weak housing market, that will be bad for us all.
I just see this as part of the overall government policy (begun with NAMA) to put a floor under the price of property.
“However, the reason for doing it is not out of mercy or compassion or pity or anything else, it’s just that if we don’t , we will leave a big chunk of the population economically inactive and stuck in a trap. If some of these people collapse economically, and have to sell their houses into a weak housing market, that will be bad for us all”
And if we do do it, we spread the economic misery wider. 60,000 debt free people enter the jobs market every September. If we tax these more to pay for those in debt, we are beggaring consumers of products and services to maintain demand levels in those who cannot afford to do so. In aggregate, we achieve nothing. As we will be borrowing to do this, we will pay interest costs on the borrowings, so in aggregate we are already negative. Further, the transfer payments will be going to pay interest on mortgages, so it is not of immediate benefit to the wider economy. It is a continuation of borrowing from future economic activity to correct past mistakes.
Better a reform of the bankruptcy laws and a recapitalisation of the banks as a result.
“I just see this as part of the overall government policy (begun with NAMA) to put a floor under the price of property.”
And that is what I like least about it. I don’t accept that putting a floor under the price of property is in any way desirable. Cheap shelter leaves room for greater competitiveness and greater economic activity as the amount of free cash that the new 60k workers generate moves round the economy at greater pace. If the government is an inefficent method of generating economic activity, banks are surely second to it in misallocation of capital…
How does reforming bankruptcy laws help? Someone still needs to pay, and this debt is passed on to the next generation anyway. If a bank collapses, which is what happens when you have a lot of bankruptcies, the State will have to compensate depositors. And even if the bank doesn’t collapse, the cost of the bad debt will have to be recouped in future bank profits, resulting in higher interest bills into the future. This has as multiplier effect that goes far beyond the current crisis.
I am not talking about simply spreading the economic misery wider. The objective is to reduce the amount of economic misery overall, by stabilising the economy.
Yes, someone needs to pay for bankruptcy, but, for example, equity capital should bear the brunt of it. Junior/subordinate debt should be next (including the government’s foolish preference shares). Higher costs of credit are also the standard method of dealing with bad debts, both for the individuals and the institutions. What you are proposing is that the government (i.e. us the taxpayers) take on the cost of bad debt with no individual hope of recouping that cost.
By increasing the taxation burden on everyone through increased tax reliefs for the few, you are spreading the misery wider.
@E34B etc. I do not think any one (well may be a couple of folk) are paying a blind bit of heed to you. They seem to have some sort of socio-economic myopia – for which there are no corrective lenses available!
Its the tax breaks, silly! That is, we need URGENT tax reforms. If you cannot stomach this, then God help us – (us ‘ordinary’ taxpayer’s, that is).
Tax breaks should be barred, constitutionally, not because they may (or may not) be ‘economic’, but because they are completely inequitable! Some taxpayers will benefit (obscenely), others will be subsidizing them!
Our current ‘economic’ predicament is very precarious. Think of it as a rapidly spreading gangrene. You amputate the affected limb fast – else you DIE! Choose quickly, ’cause time is running out to be able to deal with the matter ourselves.
1. Excess debt MUST be crammed down – no ifs, no buts, no exceptions. Yes. I know it will be extremely difficult, but its the only option. Better be 60% poorer than 100% bankrupt!! That’s it. Some choice.
2. Reform the tax structures – in tandem with 1.
@ BP Woods
surely some tax breaks are justifiable? Investment in the Ballymun regeneration scheme? Tax breaks to attract foreign capital into the country like Intel etc that easily pays for itself? Tax breaks to keep certain industries within the country, ie horse breeding (if we were relatively certain they would leave without it)?
I’ve one final objection ( 🙂 ) – what happens when interest rates go up? Do we increase interest relief again? And again? Where do we stop and admit that we can’t bail everyone out?
@ BP Woods/E43bn
the tax system is, at the very core, “inequitable” in its progressiveness. We tell people that as they get wealthier, they must contribute more of their income to society. We generally accept this as a way of running a just, functional and productive society/economy. Why is it so bizarre as to offer these same people a saving on this tax if they invest their income in such a way as to meet a policy goal?
We can all discuss the merits (or lack of) of the current tax breaks as is, but i think it would be foolish, counter productive and hypocritical to “ban” them in totality.
sorry, that should read “a bigger % of their income” and not just “more of their income”
Is it your view that 50-56% marginal rates are too high or just that these kinds of rates are kicking in way too early? With UK top rates due to hit 50% in April this kind of marginal rate is not exactly terra incognita internationally, let alone historically (where top rates up to 80% were normal in the pre-Thatcher/Reagan era).
Definitely kick in way too early. As for too high, perhaps not yet but I’d wonder whether gains from hiking up over 60% would really materialise. That said, I don’t claim that empirical work on tax elasticities is an area of expertise of mine.
Yoganmahew: When interest rates go up, the the value of mortgage interest relief goes up proportionately. (More interest charged = more relief to be gained).
Equity capital has already been completely absorbed. There is no more capacity there. The government has started kicking in money to absorb debt as well. But it has only relieved a small number of big players. It hasn’t done much for the vast number of small players.
It is hard to know what the future will hold in terms of interest rates or anything else, and it is not easy to anticipate. We are in deflation at the moment. Some people say there will be an inflationary spiral in the future (although I don’t understand the mechanism by which this will come about). If this happens, then people with a lot of debt and a lot of property will benefit from this and they will be less in need of relief. Prudent people with savings, no debt and relatively little property will be the losers in that circumstance and maybe they will be the ones needing help.
@E43B..+ BP Wood.
To propose all tax breaks are bad is unfair. Tax breaks have been provided in numerous situations in the past etc.
There has to be reward for business people to take on risk and grow business and employment.
For example if we did not invite private enterprise a lot of public infrastructure would never have been built. For example the Westlink toll bridge, do you seriously think the civil service would ever have built it? What about the LUAS lines, private hospitals, student accomodation etc.
Bertie Ahern admitted it himself, he thought there was something wrong with the public service way of doing things. The private sector is able to complete various projects (roads or schools or hospitals) on time and on budget. This is something the public service does not do very well.
Some tax breaks like section 50 (student rental accomodation) had a positive impact. Students are normally cash poor, but the idea of renting cheap accomodation is somthing that is positive. Obviously if the landlord is to invest capital in something which gives a lower return then something has to give. Hence the landlord could offset rental return for so many years etc. This idea helped the student, it helped the landlord or investor and the state benefitted in the long by having a more educated productive workforce to attract FDI etc.
There are other examples such as city centre car parking for example. Some car parks would never have been built if it were not for tax breaks etc.
Tax breaks are a attractive way of getting something done by the private sector for the greater benefit of society, wheter it be a hospital, road, car park, bridge etc. Obviously it has to be beneficial to all sides.
To propose all tax breaks are bad has a very Orwellian tone, “Two legs bad, Four legs good”. This blanket approach will not help Ireland get out of this mess.
“Yoganmahew: When interest rates go up, the the value of mortgage interest relief goes up proportionately. (More interest charged = more relief to be gained).”
This is not the way it works at the moment. At the moment, there is a fixed capped amount of relief available, so you would increase the ceiling? Permanently fixing mortgage rates at 2.5% by taxing everyone without a mortgage?
“Some people say there will be an inflationary spiral in the future (although I don’t understand the mechanism by which this will come about).”
Neither do I! I’d love that one explained. I agree with you that debtors would benefit in the event of inflation, provided their incomes went up. This is the imponderable of even severe inflation – interest rates rise, prices rise, do salaries rise to match?
I can guarantee you there will be no bailout for savers who lose out as a result of inflation. Not only are savers not incentivised, but DIRT means they are penalised. Savers have been net losers over the last ten years, SSIAs notwithstanding, of rampant inflation in this country.
I recall some years ago hearing the story of an MD who gave the job of weeding out surplus staff to an ambitious young manager. When the job was completed, the manager got his own P45 or should I say PFO.
It has occurred to me when observing IBEC types or economists emitting about wage restraint, what goes through their own minds when it’s the time of the annual reviews?
On taxing the lower paid, how manageable is life on say the average industrial wage, with two or three children and one parent is a homeminder?
You live a few miles from the local factory in a rural area, with no public transport, so a car is required and so on.
Even if both partners wish to work, it may not be an economic proposition.
Of course, being unemployed is a worse fate.
As former taoiseach Charles Haughey said: “we are living away beyond our means.”
Twenty-nine years later, this is the scenario, albeit on a less exalted scale at political leadership level.
The worker on the average industrial wage is likely to have no occupational pension, while the people making decisions on whether he or she should pay more tax may have three pensions funded from the public purse.
“Definitely kick in way too early. As for too high, perhaps not yet but I’d wonder whether gains from hiking up over 60% would really materialise. ”
This chart which I have compiled would seem to confirm your views
It shows the effective and marginal tax rates (combining income tax, the 2 levies and PRSI) for taxable incomes from zero to a million in 10k jumps for 2009. The only credits taken into account related to marital status so the rates depicted at every income level are maximums. Notable features include:
– the erratic growth in the overall marginal rate before it settles down at 52%.
– the rapidity of the increase in overall effective rate from €20k up to €80k. The overall rate tapers off thereafter and effectively flatlines at about €500k.
– the difference in effective rates for singles, married (one income) and married (dual income) particularly at low incomes.
Note that the overall rates takes account of the mix of single and married income tax payers at each income step based on Revenue data for 2005 – this wouldn’t have changed much since then.
@ Sporthog. Thanks for your reply.
My submission is that tax breaks (or whatever you like to term them) are iniquitous – which is a factual statement, not a value (bad/good) judgment. If they are prohibited by constitution (as opposed to statute) – then we are all mis-treated to the same level of unfairness – if you want a philosopher’s take on the matter.
Think of it as an infant which has been accustomed to a pacifier. They become a tad ‘old’. So you take it away. Tantrums for a few days. If you are a foolish parent you substitute a ‘blankie’!!! You only are postponing the ‘evil’ day.
As Mr Keane would say, ‘Get over it!’.
You can then have a ‘basic’ tax rate for all; for all incomes. Rate should include compulsory contributions for health, pensions and soc. welfare – or whatever. Oh, and tax exiles are NOT exempt. You hold an Irish passport – you pay!!! No exceptions any more.
Thanks again. (Just in case: I am NOT a socialist, quite the opposite according to my family) Funny that.
My Orwellian comment was not directed in a personal criticism of either you or E43B. I was commenting on the policy’s, comments ideas etc, not on the individual.
Your comment that tax breaks are iniquitous is a very strong statement indeed. I do not agree with you there.
Obviously if a tax break is not properly thought through then one side can obtain a unfair advantage over the other. The westlink toll bridge could be used as an example here. I don’t know if you could calculate the cost of the loss to the tax payer ( I am talking generally, not personally) but while the public were delighted that a bridge was built, and then a second bridge, it came at a heavy cost with tolls, long waiting times etc etc. There was even a public outcry for the gates to be opened when the traffic backed up to Finglas etc.
But if the state is unable (or unwilling) to provide a service which is required one example being student accomodation, then either society goes without the service, or a private individual (or firm) undertakes to provide it. Obviously a private firm is not going to do it for charity, there has to be an incentive for them and usually it is in the form of cash reward. I do not understand how you could see this as wicked, immoral or intrinsically evil.
In relation to your comment about Irish passport holders, there are thousands of Irish passport holders all over the world. Just one example, I know of a gentleman from former Rhodesia, he obtained a Irish passport from his wife, she was able to obtain a I.Passport by virtue of her mother being Irish. Passports were obtained and they fled the country as it was politically unstable etc.
He now lives in Glasgow, pays his taxes to the British Crown. However he pays no income tax to the Irish Revenue. Is that example iniquitous?
I know of a neighbour who was elderly, he developed a growth behind his ear, went to the doctor had it investigated and the growth was deemed cancerous and would have to be removed etc. As he was a public patient he had to wait for 6 months before he could be admitted for operation etc.
All the time the growth got deeper and bigger, so when he was operated on it was a much bigger job. This was distressing as he was a OAP and obviously took a toll on his health etc etc. If he was a private patient then he could have been operated on within a month. So in this example would setting up a private hospital to treat private patients be iniquitous?
The point I am making is not all examples in life are the same, making broad sweeping statements that all tax breaks are intrinisically evil is unfair and will do more harm than good in the long run.
Personal Income tax reliefs according to OECD quoted in the TASC submission.
Personal allowances/credits €6.57bn
Age credit and exemption €0.08bn
Medical insurance €0.37bn
Pension contributions €2.46bn
Interest relief €0.35bn
Of which: On principal €0.28bn
Social schemes €0.98bn
Of which: Rent in €0.05bn
Third level education fees €0.01bn
Exemption of child benefit €0.37bn
Trade union subscriptions €0.01bn
Saving and investment schemes €0.69bn
Total income-tax expenditures €11.49bn
The total is really €12.2bn
I jest not. And the comparison with taxing health is a straw man. The difference between taxing health and taxing unearned income from housing equity is night and day. For one thing, health is almost impossible to measure or even define. For another thing, better health is indirectly taxed more, as it permits the healthy to work harder and earn more money. Indeed, the conventional approach to taxing labour is almost a perfect proxy for taxing health, if you define the concept of health broadly.
The crucial point is that it is more acceptable to tax imputed rents, which represent unearned income, than to tax labour, which is earned income.
I dispute your argument on the indirect taxes. Firstly, the GDP denominator used in the Statistical Annex (also one of my favourite publications BTW) once again throws off a cross-country comparison, as repatriated profits flowing out of Ireland are not part of the household income base on which indirect taxes are levied. That more than compensates the difference in the comparison you use with the EU15.
Secondly, the composition of indirect taxes is what matters. VAT is proportionate (for the most part!), but the regressivity in Ireland is largely a result of a very high reliance on excise taxes. Thus, to get poetic about it, progressivity gets washed down the gullet of low income punters in Ireland to a greater extent than the EU15.
I do not have the figures to hand, but my instincts tell me that this reliance is likely to have grown over the past couple of years, as the YED of excise taxed goods and services is lower than average.
I take your point on your most interesting ‘flat tax with a threshold proposal’. And respectively withdraw my remarks concerning your zeal to tax the poor. However, I think you will accept that your proposal is probably too radical, and that in practice broadening the tax base will equate to taxing the relatively poor.
I’m not quite getting your imputed rents thing. Are you saying as I own my house and pay no rent (but have paid a mortgage for 20 years and paid for the upkeep of the house which tenants don’t) the state will tax me as if I’m receiving rent on my own house. Why not just have a straight property tax.
Paying tax on imputed rents is a simply a way of measuring the value of the house for a property tax.
Probably make it a bit more difficult to administer.
That’s right. There are similarities to property tax but the economic logic is somewhat different.
I’m proposing a tax on the use-value of the equity. So, if a young couple buys a house with a 1,500 EUR / month mortgage interest payment and the rental value is 1,500 / month, they only pay income tax on the net imputed rental income i.e. 1,500 minus 1,500 equals zero. So they pay no tax.
But if they inherit that same 3br in Lucan (therefore have no mortgage), they will be liable to pay full income tax on the 1,500 they earn by renting the property to themselves, just as if they chose to rent elsewhere and recieve actual rental income from a tenant.
This is not simply a way of measuring the value of the house for a property tax, as Dreaded Estate states, because it only taxes the equity component of the house, thereby correcting an anti-rental market bias which a straight property tax would entail.
Of course, you can levy a straight property tax and put in place tax breaks and deductions for mortgage repayments, etc. but that is backwards logic.
A property tax should be a separate thing, and it should capture the cost of the negative externalities associated with a private home. This is not a function of the title-holder’s equity stake in the property, nor whether he collected the rent from himself or someone else.
I think a tax on equity in the property would create odd incentives. It may no longer make sense to repay the mortgage and lose the tax breaks.
It’s been a while since I thought about the theory of public finance but isn’t the question of opyimal taxation one of the more settled areas of economics? By settled, I mean we still are not arguing about fundamental things, as in macro (the debate between Krugman and his antagonists seems to be about whether Say’s law applies!). We more or less know how to structure the tax system optimally?
And isn’t the debate over the Laffer curve also pretty much settled, at least analytically? The existence of the laffer curve is trivially obvious: expressed in quadratic from, we just need to establish the peak. I remember buildng, 20 years ago, simple overlapping generation models extended to include endogenous capital formation to try and guesstimate at what level of aggregate taxation the peak occurs. It’s all down to the relevant supply elasticities. of course. The claims of laffer always implied absurdly high elasticities. But, for any given elesticity of supply (labour and capital), there is a peak to the Laffer curve, beyone which it’s stupid to raise taxes.
Or am I just hopelessly out of date?
So the fact I paid off my mortgage during my lifetime is going to get me a larger tax bill and reduce the money I put into the economy directly?
If you object so much to inherited wealth, why not just remove the exemption for inherited assets and increase CAT rates?
I can see no justification for taxing the debt free more than the indebted, neither economic nor moral.
And when the next property bubble is blown, I pay increasing amounts of tax while foolish speculators get their tax bill written off because of their ‘onerous’ debt – debt they choose to take on against advice that they didn’t like (that there was a property bubble).
Finally, there is no point in having a tax on something that would be as ridiculously damaging to the economy (in that it would promote excessive credit takeup) and as easy to avoid for the rich (who seem to be rich on a gross scale and not on a net one as we have recently found out).
If you want to level society, level it at the point of income. If you want to raze it, then by all means encourage debt slavery.
An interesting point. I guess my feeling is that from our current point of view, this may appear to be the case, but that is because we are looking at it from a situation in which odd incentives have become embedded in the system (and the mind!).
Of course taxing property equity income reduces the incentive to earn off property equity, as you point out, but no more than taxing labour income reduces the incentive to work.
Bringing the rate of home ownership down a few percentage points would not be a bad thing, IMHO.
“So the fact I paid off my mortgage during my lifetime is going to get me a larger tax bill and reduce the money I put into the economy directly?”
Well, as for reducing the money you put into the economy, we can take the total tax burden as constant – either we tax your labour income or your property income. The effect on the circular flow of income is the same.
The fact that you paid off a mortgage does not, in my concept of economic justice, merit a special tax break.
Look at it this way: If you had chosen to rent for those 20 years instead and the expected change in property prices is zero, for a housing market in equilibrium, then the risk weighted cost of servicing the mortgage should equal your rent.
So instead of paying mortgage interest, you paid rent. Instead of paying principal, you put that money into a saving account.
At the end of the twenty years, you invest that money in a shoe factory. You produce lovely shoes and earn income off the factory exactly equal to the rent you are (still) paying.
Only this income is taxed!
In other words, not having an imputed rental tax punishes the renter / shoe factory owner for having chosen to invest in shoes instead of investing in home equity.
“Well, as for reducing the money you put into the economy, we can take the total tax burden as constant – either we tax your labour income or your property income. The effect on the circular flow of income is the same.”
But you are planning to do both. With an unfair exception for people who borrowed to buy stuff they cannot afford.
“The fact that you paid off a mortgage does not, in my concept of economic justice, merit a special tax break.”
Ah, ‘economic justice’, this would be some scoundrelous version of schoolboy communism? So it is justice to tax the prudent more than the profligate?
If you object to property, as others have pointed out, the fair way to do it is property tax. You are proposing to overturn a perceived unfairness (that people saved up for something rather than buying it on the never-never) by increasing the unfairness (by removing the consequences of unsustainable debt).
“In other words, not having an imputed rental tax punishes the renter”
Hey, if I’d continued renting, I would have far, far, more money in the bank.
“But you are planning to do both. With an unfair exception for people who borrowed to buy stuff they cannot afford.”
No, I’m not planning to do both. I’m not even proposing that both should be done. My comments are being made in the context of a govt budget which will propose drastic increasing in tax on labour income. What I am saying is that this less efficient and less just than abolishing the current tax break on imputed rental income.
“Ah, ‘economic justice’, this would be some scoundrelous version of schoolboy communism? So it is justice to tax the prudent more than the profligate?”
I don’t know if you are just being flippant or not. Certainly, I consider my concept of economic justice to be more than a scoundrelous (sic) version of schoolboy communism.
What I have said numerous times above, and will not repeat again, is that it is more economically just to tax unearned income than to tax earned income. If you choose to dub this schoolboyish, communist or whatever, that is fine but it is not a substantive debating point.
Yes, I was being flippant, sorry about that!
What I mean is that it is not income. If I lived on a tent on a site in Donnybrook and Donnybrook prices rose hugely, you’d be taxing me on a gain that doesn’t alter the shelter value of where I live. Presumably if the equity falls, you’d be giving me some of that back?
Equity is not income. It is a mythical market quality that has no meaning until it is liquidated. I can say my house is worth a million quid, estate agents can say it, valuers can say it. But unless some greater fool is prepared to offer it to me and I accept it, it is still just a house.
That I choose not to secure any debt on it is my business. That other people choose to buy houses over 20, 30, 40 years is their business. That governments choose to inflate property markets to benefit sectional interests (who if they were as smart as they like to tell us they are wouldn’t need the help) is unjust.
“What I am saying is that this less efficient and less just than abolishing the current tax break on imputed rental income.”
Yes, but you are only proposing to do this for people who don’t have debt. You are taxing prudence, and in my family prudence wears the trousers. Too much debt on too loose terms got us into the mess we are in. Even more isn’t going to get us out…
What is your ideological opposition to home ownership anyway?
Sorry I left the office just before your email came in. In case you haven’t yet abandoned this thread – which has become a bit of a bilateral discussion methinks, I will respond:
“What I mean is that it is not income. If I lived on a tent on a site in Donnybrook and Donnybrook prices rose hugely, you’d be taxing me on a gain that doesn’t alter the shelter value of where I live. Presumably if the equity falls, you’d be giving me some of that back?”
If the price of a tentsite in Donnybrook rises hugely, that is precisely because the ‘shelter value’ has risen. Land only has value because it can be rented out. If the equity falls, it will be because the rent falls. Naturally then, your income would fall.
“Equity is not income. It is a mythical market quality that has no meaning until it is liquidated. I can say my house is worth a million quid, estate agents can say it, valuers can say it. But unless some greater fool is prepared to offer it to me and I accept it, it is still just a house.”
See above. Equity is (or at least should be!) defined as the net present value of the stream of income which the asset can generate. In other words, equity is precisely income. If there is a difference, it is only because of the tax distortions and market rigidities our bad policies have worked into the market (such as tax breaks for unearned property income). We can correct these.
Even if some rigidities remain, what I proposed was to tax the imputed rent, not the equity directly. So if the market is in some superbubble whereby a 3br house in Clonskeagh has a “market value” of a million, but only rents for €1,200, you only pay the tax on the €1,200 – not the finance cost of the bubble equity.
“you are only proposing to do this for people who don’t have debt. You are taxing prudence, and in my family prudence wears the trousers. Too much debt on too loose terms got us into the mess we are in. Even more isn’t going to get us out…”
Well, debt is a funny word. If I owner-occupy a house worth 300k and I have a mortgage of 300k, I would not think of myself as being in debt. My balance sheet is at zero.
However, if I borrow 30k to buy cocaine and private dancers, the second I awake from my drug-induced den of depravity, I can think of myself as ‘in debt’, because I possess no assets equal to the value of my liabilities.
What you label ‘prudence’, I label ‘hoarding productivity in unproductive asset classes’.
“That I choose not to secure any debt on it is my business. That other people choose to buy houses over 20, 30, 40 years is their business. That governments choose to inflate property markets to benefit sectional interests (who if they were as smart as they like to tell us they are wouldn’t need the help) is unjust.”
Yeah, I mean I see where you are coming from. But then again, I have a strong anti-government streak in me that craves a farm in Nebraska, a dog named Krog, a barrel of shotgun shells and a bomb shelter. And certainly I agree that the govt has mismanaged the property market and the banks are attempting to rob us blind.
I don’t like the idea of taxing any income – earned or unearned. But the reality is we are social creatures living in an intrinsically hostile environment. We need socialised medicine, schools, roads and public defence, and we need taxes to pay for these things. These taxes necessarily represent an interference in what would otherwise be “your business” – whether that business entails produce shoes and selling them to punters, or whether it entails owning a house and renting it to yourself.
I think I am as virulent a Nama opponent as you are – but let’s not confound the issues. Even if we take the least-cost nationalisation option to dealing with the banks, we are still going to need a huge fiscal adjustment. Part of that will inevitably mean more taxes, and that’s what this thread is about.
“What is your ideological opposition to home ownership anyway?”
I see overreliance on home ownership as part of the problem. It gives people a false sense of isolation and impedes the performance of civic duty. Irish people – some of the most home ownership dependent in Europe – are remarkable for having very comfortable homes. Clean, cozy, warm, with lovely gardens. But then they go out in public, vomit on the footpaths, fire bags of litter everywhere and generally show contempt for the concept of shared ownership and responsibility.
The home ownership mentality is also related to the non-performance of civic duties. Irish people demand that their local TDs treat their constituencies the same way – get as much as you can for Kerry South and f**k the rest of the country.
I should stress, though, that I think home ownership does have its place in society. People want homes and families and that is all well and good. But we don’t need to create tax distortions to support those preferences. The market is happy to provide at cost.
“If the price of a tentsite in Donnybrook rises hugely, that is precisely because the ’shelter value’ has risen.”
You see, that’s where I differ (probably with all of economics, to be honest! It’s great to be an amateur and be untramelled by dogma… or even logic!).
To me, rent value = income, income = money, money = current generation. I think of land as a deferred tax asset and shelter too. You get the use of it for as long as you live and then that’s it. While you are living in it, a tent is just a tent. Build a gin palace on it, and you’ve paid tax on labour and materials. Then it is still a roof over your head.
Personally, I’d remove inheritance tax exemptions, have graded rates (much like income tax) and put a stop to this handing down of hoarded wealth. I got nothing from my parents (they’re still alive, so it’d be a bit mean!). I expect nothing from them. I’ll leave a bit to my children and grandchildren if I have any, but I fully expect to liquidate my assets and spend them.
“It gives people a false sense of isolation and impedes the performance of civic duty. Irish people – some of the most home ownership dependent in Europe – are remarkable for having very comfortable homes. Clean, cozy, warm, with lovely gardens. But then they go out in public, vomit on the footpaths, fire bags of litter everywhere and generally show contempt for the concept of shared ownership and responsibility.”
I think you are taking a section of society out of context. The bad elements in, for example, Moyross exist in private ownership too. I doubt that it is home ownership that does it.
If you want to know why people are absolved from society, try looking at two working parents, both out of the house from 8-7, five days a week. Not all ghost estate have nobody living in them!
I think, though, that there is an over-reliance on housing as a measure of success.
“Well, debt is a funny word. If I owner-occupy a house worth 300k and I have a mortgage of 300k, I would not think of myself as being in debt. My balance sheet is at zero.”
No it isn’t. You have goodwill of 300k, but as we all know, goodwill isn’t worth sh1t. House prices go up and they come down. You don’t know how much of an ‘asset’ you have until you sell it. And then if you did, where would you live? What you have is a debt of 300k and somethere to live.
Felix Salmon has something on the home as not investment: