Property Tax Post author By Philip Lane Post date July 2, 2013 The Economist has an interesting article on the varying implementation of property taxes across countries – it is here. Categories In Uncategorized 33 Comments on Property Tax ← Expert Group on debt redemption fund and eurobills → Calculating the Structural Fiscal Balance 33 replies on “Property Tax” Some very interesting points… however on just one issue… “A pure land tax, one without regard to how land is used or what is built on it, is the best sort. Since the amount of land is fixed, taxing it cannot distort supply in the way that taxing work or saving might discourage effort or thrift. Instead a land tax encourages efficient land use.” Does this mean that widow Mrs O’Leary has to pay the same proportionate amount of tax for her cottage (which is in a hollow) as Mr Developer who just built a modern skyscraper in the suburbs of Dublin. Could you imagine the “howls of outrage” from the “equality of outcome” brigade. Dear oh dear… We have commercial rates,residential property tax and now on to farm land tax. Some quite nasty, concealed ideas lurking in the piece. \Efficient capital markets (are assumed). Now that is one very big, very bad joke. There is no such entity – outside of an economics textbook. And as for the ‘owners of capital’. I have this creepy feeling that they may be a tad smart at ‘avoidance’ schemes. “But, lets move on!” The only equitable (is even this possible) manner in which to apply a property/land tax is an impost on the actual sale (or transfer) price. Presumably such a price reflects the ‘value’ the purchaser or the beneficiary places on the land/property. [There are some quite problematic issues with beneficial transfers – but since the principle of taxing the sale price is not agreed, “Lets move on!”]. It should be possible to tax the gross property rental or land use income. No allowances are allowed prior to the tax. But that might prove a tad inconveniently un-political – as they say! So, what do we end up with? A gentle exhortation to avoid any further unnecessary taxation on waged-labour incomes. Bad for incentives and all that! No, just shift the tax onto a notional use base by the owner (or occupier) – who happen to live in the property and maybe their family as well and force them to pay it out of their already taxed waged-labour income. Lovely! Local government (in Ireland) is a complete mess. It needs to be sorted – completely. Giving them access to the taxed income of residents is quite wrong – in an un-democratic sort of way. Does this mean that widow Mrs O’Leary has to pay the same proportionate amount of tax for her cottage (which is in a hollow) as Mr Developer who just built a modern skyscraper in the suburbs of Dublin. >Implying Mr. non-PAYE Developer will ever be charged property tax at all. ” Voters hate property taxes because they are what economists call “salient”: the burden is obvious, easy to calculate and hard to avoid.” Garbage. There is much more to it than that. Property taxes have two characteristics that make life much worse for voters, particularly when they are high as in the US. 1) They act as a multiplier on the risks posed by life’s vicissitudes. If a home owner loses their job or becomes unable to work due to ill-health, what was a tolerable burden when on a decent income often becomes intolerable to the point of creating homelessness and breaking up families, or at very least making life much more stressful. 2) They make smoothing expenditure over a person’s lifetime much tougher. Covering a €5,000 per year property tax after retirement will add something of the order of (I think) about €150-250k to the size of the pension fund required for a particular standard of living after retirement. Given the level of pension coverage we actually see, that’s a recipe for serious poverty among the elderly. High residential property taxes = economic insecurity = unhappiness, both for those who suffer and those who worry. Well, probably more like 150 than 250 … “Even so, they are less likely to affect people’s behaviour than income or employment taxes. A study by the OECD suggests that taxes on immovable property are the most growth-friendly of all major taxes.” Rubbish, property taxes affect peoples spending power and are a double taxation on peoples income as the money to pay it comes from people after tax income. Our government keep saying that they will not put up direct taxes on employment, instead they keep trying to find ways to mug people, property tax, USC, pension levies and soon to empty your bank account, water taxes. At least a 1% increase in the rate of tax applied to earnings is honest and in many ways fairer then all of the above because people no were they stand in each week/month. @ paulr, You forgot to mention the mandatory “Broadcasting charge” tax. It is a form of “mugging people”, no doubt about it. I would not be surprised if a mandatory motor tax is introduced, even if you don’t own a car. The normal practice is to base the tax on the market value of the property. Bona fide farmers usually pay based on the residence on 1/8 of a hectare. The tax is levied by local and regional (town and county) government. Valuation is done by a 3rd or higher level of government (provincial, national). The lowest level of government collects the levy which is shared with the regional government as set out by a higher level of government. Primary and secondary school boards are usually also allowed to levy taxes which are also collected on the same bill as the local/regional gov’t. A higher level of gov’t matches what is collected locally and a local school board (elected) manages the schools. The main benefit is that fewer cute hoors would be elected to local/regional councils. And of course the central gov’t would cease to be lord and master. In most countries it would be most unusual for local gov’t to be aligned with national political parties. Another benefit is the tax is easy to quantify and difficult to avoid. An important factor in Ireland. For decades Ireland has been strewn with vacant houses used a few weeks a year by people from Irish cities or Irish from abroad holding on to the old home because it costs so little. Any additional tax being proposed must explain HOW that tax will be paid (see BCT above). That is, what will be the source (income stream) of the monies that will be used to pay the tax. This is seldom done, and it appears to be assumed that somehow, magically in some cases, these monies will appear. Well they won’t in some cases. Worse, this predicament (inability to pay) is often glossed over and submerged in rhetoric – however well meaning that rhetoric may be. If you lack the income resources – your quite literally, screwed! So could we start, and continue this quite difficult discussion, not by outlining and explaining new or additional taxation (we do need taxes), or what the impost should be placed on, but out of what source the different sections of our population, who will end up having to pay the proposed tax, will find the monies to pay that tax. And further, what may be the likely outcomes in terms of overall consumer demand (we are a monopoly-capitalist economy – are’nt we?). Because, whether we like it or not, if overall consumer demand is depressed by imposing a new tax, then existing consumption-based taxes (which are based on the Tooth Fairy idea of constantly rising consumption!) must decline. That’s great, that is! Its simply shifting money from one pocket to another. There is no ‘new’ or additional money. Property/land does not generate a new or additional income flow unless its leased or put into productive use. And please, no guff about notional incomes or benefits-in-kind. Just ‘show me the money’! And explain whence it comes. And all this is before we have self-imposed, widespread deflation in wages and salaries – and God help us, the total number of persons employed in productive employments. Its time to get those cognitive neurons connected. Some folk have a lot of explaining to do on this one. And there are some very difficult decisions needed. Even Milton Friedman allowed that each citizen in a monopoly-capitalist society needs a minimum income in order to survive and participate. Paul Samuelson, before he got somewhat derailed, made similar suggestions. As did Adam Smith. Its back to basics time. As Mickey Hickey points out; “Another benefit is the tax is easy to quantify and difficult to avoid. An important factor in Ireland.” This IMHO is the essential point and goes far beyond the debate on the technical aspects in terms of importance. The fact that Ireland has succeeded in implementing the tax when Italy has failed to do so is an important step in ensuring that Ireland continue to part company with the Club Med countries in the perception of the markets cf. http://www.guardian.co.uk/commentisfree/2013/jul/03/portugal-prime-minister-troika-rules The boast of previous Irish governments was of taking people “out of the tax net” when the responsible position for any government is that all able bodied persons not in full time education should be assessed for tax (whether they end up paying any or not being a different matter). The property tax will ensure that those “slipping through the tax net” are reduced in number. “For property taxes to become a much bigger source of revenue, governments must apparently ensure people don’t realise how much they are paying.” The self assessed Irish property tax, a tax on dwellings, does the opposite of this. I suspect FG and labour will pay a significant political price unless the voters can see real value for money which under current arrangements is not possible. Bottom line property taxes are very silly. Its akin to levying additional taxes on people with red hair – the basis of the charge is economically all wrong and without foundation. Taxes are fundamentally levied based on economic activity. Economic activity in its broadest definition in a non barter world is calculated and accounted for on the movement of money between parties A and B for the provision of service or a sale of goods. For instance in the case of PAYE party A for the provision of his/her labour is paid cash by B and taxes are levied on the passing of the cash from B to A. In the case of motor tax party A, a car/motor vehicle owner, uses the road and its various ‘services’ such as lighting, sinage etc and in turn pays a fee to the provider B namely local Govt. And it goes on. Provide a service/sell goods, get paid – opportunity to levy a tax. Simples. I own a house and beside me lives somebody who rents a similar house. I as owner don’t or more realistically can’t seek to charge the postman for instance for delivering mail to my house nor can I charge the ESB meter reading man for calling and doing his thing etc etc in order words my house sits – it never earns, it can’t charge for simply being there – no economic activity as defined will ever arise if it remains in my ownership and importantly its alternative use value in the overwhelming majority of houses is NIL i.e. there is very unlikely to be any alternative use income lost to the system for it being there aside from agricultural activity which we continue to subsidise so in the case of the EU building house on land may oddly enough save taxpayers in the longer run. Basically put ownership per se is not an economic activity and in my opinion fails as a basis for levying taxes. The manner in which we have gone about levying the ROI property tax allows the renter living next door to me, who could be argued avails of all the social services that I as owner do, and yet incurs no property tax. As far as I can determine the renters living on my street are not forced to walk on the far side of the road where the footpaths are inferior or where the street lights aren’t always working – no, they avail of exactly the same services as I do. Again suggesting that the charge is doublely daft as its discriminatory in its outline. Bottom line – ownership is not an economic activity and no amount of guff or stats will change that basic fact. Lets get real here property taxes are simply additional income taxes levied on owners because with no earnings coming from a house the taxes can’t be found from any other source and Brian Woods Snr above is 100% accurate in his analysis. Surely the Economist are arguing that we should have land value tax instead of rather than as well as our income taxes (or a portion of them). The benefits claimed are impressive, especially smoothing the boom bust cycle in property, see also the Wiki article: http://en.wikipedia.org/wiki/Land_value_tax However it doesn’t address BeeCeeTee’s 2 criticisms, they are important points I’d be interested in how if at all a land value tax can address them. Comments above certainly prove the article’s point about the unpopularity of property taxes. Fairness and efficiency are desirable attributes of the tax system. Robustness and sufficiency are absolutely essential attributes. Ireland’s income and transaction-based system may have room for improvement on the first two grounds, but on the second two it has proven itself a dismal failure. Revenues did not just fall in 2008/09, they plummeted. And this is the second time in two generations that the state has mismanaged its finances to the point of crisis. Meanwhile we continue to quibble about the fairness and efficiency of new taxes. (When what we really want, is just not to have to pay them!) @BCT are we on an economics site or bleedinghearts.com? 1-any links to that,I can’t comprehend your assertion that there is any correlation btw. homelessness,families breaking up and RE Taxes-but yep life is stressful in the big city and its suburbs. 2-Move to eh a lower RE tax state/area say like like Florida-wonder if the old foggy’s will figure that one out? I think we should finance our public debts entirely though a property tax. I think those with smaller and less valuable homes should pay the most. Pensioners should pay double. Income taxes and other wealth taxes should be cut as well, in anticipation of a recovery. The Irish people — especially the poor ones — need to be collectively punished for allowing the Germans to lend so much money to irish bankers. Threatening to throw Paddies out of their homes is the only language they understand, and it’s the only way we can get out of this recession while protecting our essential professional elite, like the ones in the Anglo tapes for example. The usual whinge feat from the usual suspects. Property tax is a great idea for extracting a few bob towards the running of the country from the 80% of households who receive more in transfers than they pay in direct taxes. Commercial rates should also be extended to farming. All taxes collected locally should be retained locally. Then we would see some improvement in governance. Off topic but this is just banna republic terroriy,up there with the loony left opposing taxing real estate assets….like really ! “Today’s Auction Cancelled We regret to announce that today’s auction has been cancelled. Further information will be announced shortly.” http://www.allsop.co.uk/283/irish-auctions Taxes that impose a more onerous burden on the poor and disadvantaged are usually mitigated by government policies. For example homeowners below 1.25 times the poverty level get a sliding scale grant to soften the blow. They still pay property tax but file income tax returns and claim the grant. Similar schemes are in place to deal with VAT. A property tax payable to local/regional governments means that the national government can reduce income tax. It can be a zero sum game. Of course using the Irish model of gov’t. The Head Waiter and the Waiters catering to our every whim an efficient tax system is unlikely to be implemented. The major benefit of property taxes used to fund local governments is that local services continue to be provided when income tax and corporate tax revenue is tanking. Just another stabiliser which the Germans understand so well. I would have reservations about taxing productive farm land,since we all eat, it is a pay me now or pay me later proposition. I would go after vanity farms that are not farmed productively. What a fuc**ing dope….no problem at all with peaceful protest but try that in Nevada,Florida and some rather serious x military security guards would have a word and Gerry would be on his arse outside,it’s an IRISH company !!!! “One of the protest’s organisers Gerry Beades said Allsop was “a British firm of auctioneers that has been brought in by Irish bankers,” However, Mr Hoban said that it was an Irish-registered company with Irish employees.” http://www.rte.ie/news/2013/0704/460530-property-auction-dublin/ “Allsop Space is an Irish firm established in 2011 and has grown to become the undisputed market leader in national property auctions. The company was founded following the hugely successful inaugural auction of over 80 properties nationwide on 15th April 2011, held jointly by Allsop, the UK’s most successful property auctioneer, and Dublin property consultants, Space. The company, based in Dublin, proudly continues to offer a highly effective service employing a large, expert team of chartered surveyors and legal executives with a wide range of property and legal expertise. Every catalogue contains a broad mix of properties offering opportunities within various sectors, including apartments, houses, retail, office, industrial, pubs, hotels, farms and development sites.” Link above. @John Gallaher. Allsop is a UK company. There is nothing wrong with that. A pity the crowds rage was directed towards troglodytic ant-British nationalism instead of towards the criminal Irish elite were it belongs. Once again, the Irish will reach for nationalist pacifiers instead of facing up to the real problem. I’m disgusted with these protesters, not because they protested, but because they protested in the wrong place. @OMF the auctioneer is/was Allsop Space-selling a mix of assets perhaps some British REO’s giving new entrants an opportunity to make a few bob !!! JG, Is that the same Mr. Beads who was VBF of a former Taoiseach. @Tull no idea truly…REO is yank for real estate owned…or foreclosed. Why presume that these are Irish bank owned,and if they are you guys own them…do you not want realize any proceeds? Given the absolute dearth of foreclosures it’s quite possible there were a number off willing sellers,as in non foreclosed,people just sick tired owning some RE with a low basis,or perhaps under pressure or made a “short sale” deal with lender. Perhaps people wanting to deleverage or emigrate,who owns Savills they sell a lot of RE too! This redefines financial illiteracy…. JG, What is being attempted by some here is an Irish version of jingle mail, where the bank gives you back the keys and agrees to call it quits on the money it recklessly borrowed to you. It is fantastic financial alchemy by a class of people attached to the old regime. They appear to have support from the FF gene pool @ skeptic01: “(When what we really want, is just not to have to pay them!)” Yes? You do have evidence for this? No one likes taxes. But we DO HAVE to pay them! Else … … The property tax is not unpopular – its just plain inequitable! Read YoB (above). @ Tull: 2.17 pm: “The usual whinge feat from the usual suspects.” Name them please! And what is the whinge? I’m complaining about an inequitable tax. Actually the entire matter is a great deal more serious. Please think carefully about incomes (nature of, and whence they come) – not taxes! Income precedes taxes in time. No income => no spend => no taxes. @ MH: I’m nearly with you. But our local government is a complete shambles. It needs to be demolished and re-built from the bottom up. Not likely! @ BW “Efficient capital markets (are assumed)” http://www.ft.com/cms/s/0/b74d956c-e44e-11e2-91a3-00144feabdc0.html “Thursday 19.15 BST. Equity indices leapt and sterling and the euro sank after the Bank of England and the European Central Bank caught the markets off guard with extremely dovish policy comments aimed at countering recent rises in market interest rates.” All that money stranded in the market needs some CB TLC to ease the nerves. Efficient, my arfe . And this crisis is going to go on for a long time more. Tranquiliser addiction is a very hard one to drop. I see the point of BCT with the risk increase as very important. If property taxes would “stabilize” why did Germany with a low tax not have a bubble? In fact I would argue that the AAA countries (DE, AT, NL, LU, SU(omi) in Europe have low property taxes (in the IMF link). In normal times I am more against property taxes. But in hard times, like after WWII, we did that as well. @francis Do you know why Ireland was the only eurozone country to have a commercial property bubble? Below is the answer; The eurozone is a group of seventeen countries with a combined population of three hundred and thirty million citizens. All member countries have the same currency,the same central bank,the same interest rates and the same commercial property lease law except one,Ireland. Ireland has very different commercial property lease law to all other eurozone countries. The three components of all countries commercial lease law is the length of the lease,the rent determintion process and lease exit strategies/break clauses. In all other eurozone countries lease lengths are short,say three to ten years,with break clauses and rents are indexed annually to changes in the consumer price index. In Ireland lease lengths are long,say thirty five years,with no break clauses and rents are reviewed every five years using the ratchet upward-only rent review process. This review process used the highest rent as evidence against all tenants and was open to malpractice and corruption. Irish commercial property lease law was a twinheaded monster which incentivised the over-renting of tenants and more damaging,it was the rocket fuel for the commercial property valuation model which created the monster commercial property bubble. When this bubble burst it destroyed the entire Irish banking sector. Reckless Irish banks lent tens of billions against these ruinous leases,not against the properties themselves. If Ireland had had regular eurozone commercial property lease law it would have been almost impossible to have had a commercial property bubble. The only reason Ireland had this feudal lease law was because the corrupt Irish politicians organised sovereign leases for their bagmen. All Haughey’s bagmen are sovereign landlords @JC You are still correct as to the reason for the corruption. Time has come to get out of here. @Tull … the same. I think before making judgements about that article it is wise to do some research on the salient points. The one most notable is the reference to land tax. What the author is actual writing about is land value tax, it was going to be introduced here as site value tax until it turned into the property tax. Land and property are two separate things. The value of land is based on its productive value or its location. The woman in a small cottage in west of ireland has little to worry about. All wealth in the world is based on land ownership. Why have so many wars been fought for over milleniums. What about the Bull McCabe? Land generates income. If your family owns land in a city and doesn’t pay tax on it, you are on a free ride. That same quantity of land is next to worthless if it is based on side of a Mayo mountain. Society makes the land worth something, yet we don’t extract the cost of maintaining that land, for roads, lights, sewage, etc. Rates are paid by business owners not land owners. Do your research on LVT. It is the only why to extract tax from wealth. Wealthy individuals can’t take their homes and land with them when they go abroad to avoid tax. (who won’t if they could get away with it). Taxing their land who force them to pay a contribution. As their land is usually in nice areas then they would be paying higher tax. Anyway could write essay on this so just do your research. There is no point of criticism made above that cannot be addressed. See http://www.landvaluetax.org/ Comments are closed.