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Fiscal Policy

Property Scheme Tax Incentives

One of the major issues that I think needs to be addressed this year is the role played by tax expenditures in our budgetary system. Reports such as this one by TASC have pointed to closing off tax expenditures as having an important role to play in closing the budget deficit. Chapter 8 of the Commission on Taxation report does a pretty good job of listing many of these tax reliefs and recommends shutting many of them off. There are serious discussions worth having in relation to many of these reliefs, such as those for pensions, but I don’t have the time to get into these issues now.

Interestingly, one particularly controversial type of relief that the Commission report does not examine is property incentive schemes; the report argued that since the decision had been taken to close off these schemes on their completion, they should not be examined. Information on the cost of these schemes was, however, reported to the Dail by Minister Lenihan last November in response to a parliamentary question from Joan Burton. The link to this answer is here but I know not to trust links to the Oireachtas website so I’ve also put up the answer as a Word document here.

The total amount of tax revenue lost from these schemes in 2007 was €435 million. I suspect this is smaller than some people might have expected, given the widespread nature of claims that the very richest in society are managing to pay almost no tax through their extensive use of these schemes.

Still, it is a decent amount of money. It would be interesting to know what these schemes are expected to cost this year and next and whether they can legally be closed. I suspect they can. Another interesting question is whether many of the individuals that availed of these schemes are now bankrupt and wouldn’t be able to pay any tax.

11 replies on “Property Scheme Tax Incentives”

Karl

As you say, all of these have now been closed off to new entrants, with the possible exception of the private hospital scheme (which probably should be).

When we you ask whether they can be legally closed, do you mean that the State should retract promised tax relief /capital allowances from individuals / businesses that have already made investments?

Irrespective of whether or not this would be legal (I’m sure it would be challenged by the courts as these investments would have been certified for relief by the Revenue Commissioners), what would it say about Ireland’s business environment and political risk? The IDA is out selling Ireland to the world on the basis of our low corporate tax rate and other tax supports for R&D, intellectual property, holding companies structures and financial services. It might become a tougher sell if the word got out that Irish Governments were inclined to welch on its tax commitments to investors.

Andrew

Karl,

You might consider using Kildarestreet.com for Oireachtas links – it takes all the information from Oireachtas.ie transcripts and makes it easier to browse/use/link. It’s run by a not-for-profit company.

The Oireachtas officials are on board with it and willing to help the KildareStreet.com team develop the site to make it easier for the public to access their information. Improves will continue to be made in the coming months.

It was launched without fanfare late last year.

Mark

@ Mark Coughlan
Your site is a very valuable and helpful resource. Best of luck with it. Coverage of debates is most revealing.

It is a well known that people who had property were annually given ultimatums by their tax advisers on tax avoidance which consisted of get another apartment, sea side residence, student accommodation etc., etc or else just hand your money over to the tax man. Give a guess what they did? “You can offset all your rental income anywhere in the state” against your tax liabilities usually worked a treat it forced people to build portfolio’s of properties they neither wanted or needed.

The whole thing was and is, an ill thought out disaster. It was the petrol that fanned the flames of overdevelopment as well as the attitude that tax was only for the little people.

@ Robert Browne,

Fair enough point about the creation of property schemes etc.

But you don’t have to buy property to reduce your tax bill. If you own a small business you could buy a commercial jeep instead.

I know one small shop owner, his accountant tallied up the sums and told him his business tax liability for the year was 30k. He could pay this or else buy a commercial jeep and pay nothing.

So what did he do? Well he bought himself a nice fancy jeep instead.

You could of course argue that the Revenue still got something, as VRT had to be paid on the jeep, as I suppose VAT has to be paid on the materials which are used to build a house.

What about the gain from these fiscal stimuli? It is easy to make fun, but A lot of s23/27 developments, though not all are of higher density than other development of the last ten years. In tallaght, for instance, the areas of higher density were urban renewal areas; the other new builds were unsustainable, low density. S23/27 was critical to the ballymun regeneration too.

Our system of interest relief for rental property was the biggest driver of all of the bubble, rather than the schemes.

I used to know several auctioneers in Dublin. I knew them from way back. But at weekends I know they would often sell 2 no. new apartment for €800k a piece. These buyers would only be in Dublin city for the day, and go back to their lives elsewhere, having done the said deal. I mean, a lot of the market in Dublin was supported by that kind of thing – the interest relief for rental as you say – obviously these people had the interest to pay, elsewhere in their business or whatever, in some other part of the country. It was quite surreal in my mind, as a young worker going to even view property in Dublin, in competition with what I mentioned. Even more surreal as Sarey Carey mentions for homes 50 mile drive away from Dublin city, going for €350k.

Re: Tax Incentives (aka: Pickpocket the Non-taxpayers).

The belief that ‘Tax Incentives’ (lovely ironic phrase) provide/generate any nett aggregate economic benefit is ideological claptrap. That’s it, period. Don’t take my statement on this; read Pareto. Or should they be termed ‘externalities’? Whatever: these ‘schemes’ – scams actually, are simply inequitable. Mind you, if your not a liberal democrat you will robustly defend them as ‘just’ or ‘necessary’ or whatever. One’s beliefs do form one’s economic and political Models-in-Use – hence one’s behaviour. Cui bono? Cave auditor!

Legislate a Constitutional Amendment to prohibit all/any such scams. Have a simplified Income Tax Code: every citizen (resident or no) pays on all personal income – irrespective of source. The taxing of companies or land, excise duties, VAT rates, etc., are separate issues.

Might I remind you of Gouzenko’s Axiom: ” (political) promises are given according to motive, but are fulfilled according to circumstance” [Igor Gouzenko, Fall of a Titan]. Legislator’s can, and will legislate to protect themselves – just depends on which Special Interest Group is the flavour of the month. That’s it. ‘Nuff said.

B Peter

All property tax incentives are legacies of our pro-property bias (so we can conveniently blame the British…) – but the biggest tax incentive, as I am always at pains to point out whenever the subject comes up, is the lack of tax on imputed rental incomes for owner occupiers.

This is billions of euros a year. It distorts the market at it is inequitable too. In fact, there is no logic to not taxing imputed rents.

@ BP Wood,

We already have tax legislation in place where a citizen is taxed on their world wide income. If you live in Ireland and made money on share transactions on a Australian stock exchange then you are subject to taxation on your profit here.

In relation to your comment about taxation on all citizens of Ireland just how do you tax a Irish person living in another country when they are already paying tax there? We have numerous double taxation treaties, and in a globalised world it is unfair for a person to be taxed twice. In fact the Revenue are expanding the double taxation treaties each year.

Why do you propose taxation of land to be a seperate issue? People who have invested in Forestry recieve significant tax breaks / subsidies from the Govt. Funny that, arn’t you in this category?

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