Over the weekend, the Irish Times led with eye-catching headline “Piketty says [Ireland’s] property tax unfair and should be altered“. The juxtaposition of Piketty, arguably the world’s most talked about economist in 2014, and Ireland’s property tax, possibly the smallest property tax of any developed country, is due to Piketty’s presence in Dublin this Friday to talk at TASC’s annual conference.
Piketty’s point is that property tax – a tax on the most prevalent form of wealth – takes no account of debt, mortgages being the most prevalent form of debt. In his own words:
“I think if you have a house that’s worth €400,000 but you have a mortgage of €390,000, you know you’re not really rich. Your net wealth is €10,000 and you are paying back in interest payments as much as a tenant will pay in rent. So there’s no reason why you should pay as much property tax as someone who inherited his €400,000 house or who has finished reimbursing his mortgage 20 years ago.”
I have to admit that I cannot agree. My problem with this line of argument is that it is effectively a subsidy of leverage. This is something Ireland is consciously moving away from (for obvious reasons), in particular with the end of Mortgage Interest Relief.
Not that there is no debate to be had. Net wealth and gross wealth are separate concepts and it is certainly possible to consider which we might want to tax and why. However, taxes change behaviour and if you say to an economy “we will give you a tax rebate for every euro of debt you take on”, then if Ireland has €350bn in residential real estate, we should not be surprised if as a society that becomes our target for mortgage debt. While Thomas is correct to point out that net wealth is different to gross wealth, we should not forget that ignoring gross amounts and balance sheets is a large part of what got us (for us, read Ireland or world economy, as you choose) into this mess in the first place.
Perhaps more importantly, we tax property for a reason. That reason is that society is trying to recapture some of the wealth that it has created for private individuals, which is reflected in land values. (I am side-stepping one important issue for the moment, the property tax vs. land tax argument – as William Vickrey, 1996 Nobel Prize laureate in economics, noted: “The property tax is, economically speaking, a combination of one of the worst taxes, the part that is assessed on real estate improvements and one of the best taxes, the tax on land or site value.”)
So, the taxation of built capital aside, the taxation of land values is not just an arbitrary additional means of generating revenue. It is unique, in not affecting our behaviour, and in capturing pure economic rent. In the words of another Nobel Laureate, James Mirrlees:
Taxing land ownership is equivalent to taxing an economic rent – to do so does not discourage any desirable activity. Land is not a produced input; its supply is fixed and cannot be affected by the introduction of a tax. With the same amount of land available, people would not be willing to pay any more for it than before, so (the present value of) a land value tax would be reflected one-for-one in a lower price of land: the classic example of tax capitalisation.
If you alter that, by saying “you can borrow to buy land and not have to pay tax”, unsurprisingly you no longer have a uniquely beneficial tax. Clearly, we are far from land value tax in Ireland but the principle remains.
Even if one does not accept the argument that property tax is a charge on services provided by the state, there is a fundamental difference between a renter and a mortgage-holder: only the latter is buying a ticket to future wealth (in net terms, you already have it gross terms). At least two effects occur when you give debt-rebates for property tax. The first is increased leverage, as mentioned above.
The second is distributional and thus perhaps of even greater interest for Friday’s TASC conference. For example, in the case of Ireland, there are (very roughly) a third of households owning without a mortgage (the richest third), another third with mortgages and the final third living in rented accommodation (by and large the poorest third).
If you give a tax rebate to the middle group – who, remember, have wealth that the poorest third do not have – then by definition the other two groups have to pay more in tax to compensate (assuming that there is some fixed target for government revenues).
This doesn’t mean that I am unsympathetic to Ireland’s negative equity generation. Indeed, in the report I prepared on introducing Land Value Tax in Ireland in early 2012, I outlined precisely how one might take account of legacy negative equity in the new property tax system. But good policy should be future-proof – and can then be tweaked to take account of current circumstances. And given that it should be a major goal of policy to prevent huge negative equity from ever happening again, it seems odd that we would institutionalise this feature.
They say the best tax is an old tax. Failing that, the best tax is probably a simple one. Taxing the value of property (or ideally the value of land) is simple. Introducing tax rebates for debt – however well-intentioned – turns it into a game where everyone wants to minimise their tax liability (in this case by increasing their debt liabilities). For me, that’s not the way to go.
P.S. As is now customary for blogging economists (and perhaps soon mandatory), I feel I should reveal whether or not I’ve read Piketty’s book! It’s my book-of-the-month for June and I’m about 1/3 of the way through.
57 replies on “Thomas Piketty and the subsidy of leverage”
It just shows you; once someone becomes angelic in the eyes of the media/commentariat, they can get away with any old shite.
” if you say to an economy “we will give you a tax rebate for every euro of debt you take on” ”
I am confused by this remark. If someone borrows funds then surely their net wealth is not changed. They have taken on an asset and a liability of the same value. So their burden of tax (under a net wealth tax) would not change. They are not getting a tax rebate then.
Obviously I am missing something here.
The other part I’m wondering about is this:
“The second is distributional and thus perhaps of even greater interest for Friday’s TASC conference. For example, in the case of Ireland, there are (very roughly) a third of households owning without a mortgage (the richest third), another third with mortgages and the final third living in rented accommodation (by and large the poorest third).
If you give a tax rebate to the middle group – who, remember, have wealth that the poorest third do not have – then by definition the other two groups have to pay more in tax to compensate (assuming that there is some fixed target for government revenues).”
If the richest third pays more to compensate for the middle group paying less, while the poorest group continues to pay the same as before (which presumably is what Piketty has in mind), then is there greater equality or less? This seems ambiguous to me. There might be greater equality. But you seemed to be implying otherwise.
Here’s an example:
I’m an upper middle class person with cash on deposit or invested in stocks or shares or in a business. Maybe I have a good secure job. I decide to buy a better house but that I’ll hold onto a chunk of my cash for that rainy day and take out a larger than necessary mortgage anyway. The bank happily lends me the money, knowing I’m good for it as I’ve so much security. Now I pay less property tax than someone who uses their cash/investments. We both have the same “wealth” but according to Piketty I pay less tax.
And does this feed into BTLs?
Similarly you can imagine someone applying for a mortgage. Well, they can knock the cost of property tax off their expenses to help jack up the amount they can borrow, thus fuelling house price inflation.
And as I said on my original comment on the other thread – none of this makes any difference to the local authority, the end recipient of the tax anyway.
A small point re the BTLs firstly taxes are not an allowable cost against rental income so BTL owners pay the property tax out of their net rental income. Anyway.
A couple of things. I indicated here at the time of its introduction that to label this tax as a property tax was stretching credulity – its simply another form of income tax because the last time I checked my negative equity house did not have an ATM attached to it and any property tax that I pay comes out of my net after income tax income i.e. this is in any mans language another from of income tax except the basis of which is bizzare as Ronan Lyons pointed out at its introduction. Using a valuation method as we have proceeded to do to calculate the tax is stupid squared. Most sensible people recognise this.
You see I have a problem with your logic too.
Do those who rent not enjoy the same access to public services as those who own houses ? I mean are those who rent expected to walk down the side of the street where the footpaths are less well kept ? You and I both know that the answer to this is no and yet those who rent pay nadda property tax.
Ronan Lyons tries to explain this one away but in my view his argument fails- have a read as to what he wrote re an SVT when he justified renters not paying..
“..It should be remembered though that SVT is levied on property owners, not on residents: it is a charge on the wealth associated with being able to avail of particular amenities, not necessarily for accessing those amenities…”
The difference in his view boils down to being able to avail of services rather than accessing same. Hogwash – the costs as you rightly point out are the same irrespective of what part of the divide you stand on yet the allocation of the full cost is to the property owner. This doesn’t make any sense and as a consequence the current structure of the tax is equally barmy.
So we are now left in an interesting position – negative equity novice property consumers paying significantly more income tax than they would have ordinarily expected (most negative equity households bought when Govt Debt to GDP was in a downward path). Paying additional taxes (of every type) for the bad bets of the bank bond investors, continually paying more than similar sized countries for most types of local public services, paying more for the ongoing central State running costs than equivalent sized countries and now also being asked to pay for the privilage, in a large cohort of the cases, for being in a net liability position. DAFT.ie is about right.
@yields or bust:
You say: “any property tax that I pay comes out of my net after income tax income i.e. this is in any mans language another from of income tax”.
In that case VAT, Excise or indeed any other tax I pay is “another form of income tax”.
Sound like you are consigning much of the literature on the economics of taxation to the dustbin.
I take a lot of that on board, but remember the point here is specifically Piketty’s argument that the amount of property tax you pay should be directly related to the size of your mortgage. The structure of the tax, how it’s calculated, the renting issue etc, are all outside of that specific point.
The renting issue is an anomaly and I’m not committed either way. It does seem unfair in ways, though I don’t envy anyone renting at the moment, but perhaps just to say this:
I like the idea of making it more expensive to own a property to the BTL’s. It was nuts the way so many people became landlords, and a driving factor there was the low cost of ownership. With few taxes, an interest only tracker mortgage and Bob’s your uncle, I know people who with NO money whatsoever became landlords. One guy I know owned 5 houses so he could put them together as “collateral” to buy the fancy house he wanted to live in himself. Property taxes and second house ownership taxes help put a stop to this madness by increasing the cost of owning a house.
On the second form of income tax – well yes, all those charges are paid out of net income but if you want to look at it in a punitive way, the lesson is: don’t buy a house you can’t afford, and that doesn’t mean just the purchase price and mortgage repayments. Going back to the critique: a property tax has many purposes, and I grant all the flaws our tax has BUT the essential points of:
– raising revenue for local authorities
– acting as a damper on house prices and ergo
– acting as a damper on borrowing
are there, and so Piketty’s system would totally undermine those minimal benefits.
I think Ronan Lyon’s makes some very good arguments against the Picketty view of allowing a debt offset before before calculating property tax.
[I assume that Picketty’s position on this matter does not negate his general position re wealth distribution.]
The site value tax is an excellent idea. Even consider the application of the site value tax on vacant sites. The rate could be set to control the flow rate of conversion into houses, with a low tax in times when houses are in surplus and a punitive rate, by area, when houses are in short supply, as is presently the case in Dublin
“Do those who rent not enjoy the same access to public services as those who own houses ? I mean are those who rent expected to walk down the side of the street where the footpaths are less well kept ? You and I both know that the answer to this is no and yet those who rent pay nadda property tax.”
Yes, those renters walk on the same side of the street, but usually on streets with poorer paving. Where they walk on better paved streets, the landlord (property owner) is usually compensated by a higher rent in the more salubrious area.
Those who rent pay, wherever they rent, pay market price for the rent, with little or no tenure in Ireland. It would be pushing it a bit far, that tenants should be compelled to make sure that the landlord never loses, and is compensated for every increase in tax and every increase in interest rates. Then again, perhaps that is what the BTLs in arrears are expecting!
I think what is getting lost here in Piketty’s observation is if you are looking to tax wealth you need to be concious of the difference between gross and net wealth in terms of what you are trying to achieve – are you looking at redistrubtion, promote allocative efficiency of resources, simply filling the state coffers etc….
As for Ronan’s ‘subsidy on leverage’ argument – isn’t that the principle enshrined in all corporate tax structures? Why does it make sense for business and not individuals…?
Not to mention the more general subsidy of leverage, via making interest payments on borrowings a tax deducible expense.
Competent tax planning often obliges various ownerhip structures, not least corporates, to borrow.
“I decide to buy a better house but that I’ll hold onto a chunk of my cash for that rainy day and take out a larger than necessary mortgage anyway. The bank happily lends me the money, knowing I’m good for it as I’ve so much security. Now I pay less property tax than someone who uses their cash/investments. We both have the same “wealth” but according to Piketty I pay less tax.”
Don’t forget that in that case you would have additional offsetting savings and would pay tax on those (eg DIRT income tax, CGT) instead of the reduced property tax.
Are the five houses that you mention Section 23 properties, by any chance?
And is the owner running a business?
The real “madness” lay in these schemes which were not generally to the advantage of individual investors i.e. who had no other rental income to offset. But they were to the advantage of small business operators generally irrespective of party affiliation. If one is looking for the explanation for the startling similarity of the depredation inflicted on towns and villages across the country, you need look no further! Or for an explanation for the evident political unwillingness on the part of the established political parties to come to grips with it.
Many BTL’s borrowed on the basis of tracker mortgages. And these are extensively in arrears.
P.S. I was completely unaware of this relatively new information source until recently. The esteemed members of the Oireachtas can no longer claim that they are lacking in back-up services.
By the way, I presume everyone has read this:
“They also reveal that “jumbo” mortgages (those with exposures exceeding €750,000) are far more entrenched in arrears than smaller mortgages, creating a major burden despite only making up a small percentage of mortgages.”
Some decent discussion, at times, here (esp P2):
Riddle me this. Who is the wealthier man?.A man who is renting a house at 5k per month, who is a senior executive in MNC on an income of 150k p.a.or his next door neighbour who owns a similar house and is unemployed. Both houses are the same market value of say 1 million.
In Piketty’s world, both are equally wealthy (he disregards human capital when he considers wealth), as wealth is about the stock, not the flow.
In the world of taxation, they are again both equally wealthy (and thus any wealth tax would raise the same amount off them). Equity demands as much as this unemployed person is considerably better off than another unemployed person who has no assets.
Equity also suggests that, overall, we should be taxing the MNC executive far more than the unemployed man. This of course should be done through income tax (the flow, rather than the stock), rather than the wealth tax.
A Wealth tax is paid out of income, even if the tax base is land or property
This is a property tax not a wealth tax. Everybody would agree that a wealth tax should apply to net wealth. But surely nobody argues that motor tax should be adjusted according to how the purchase of the vehicle was financed.
Sarah carey says:
“Here’s an example:
I’m an upper middle class person with cash on deposit or invested in stocks or shares or in a business. Maybe I have a good secure job. I decide to buy a better house but that I’ll hold onto a chunk of my cash for that rainy day and take out a larger than necessary mortgage anyway. The bank happily lends me the money, knowing I’m good for it as I’ve so much security. Now I pay less property tax than someone who uses their cash/investments. We both have the same “wealth” but according to Piketty I pay less tax. ”
I think you have misunderstood Piketty’s article. He says this:
“I would transfer it to a progressive tax on net wealth, meaning real- estate property value plus financial assets, minus debt, minus mortgage and other financial debt. ”
So, you must add financial assets. So the cash you have kept for a rainy day is added when determining the tax you pay.
Sarah Carey has shown how Daniel Kahneman’s ‘Thinking, Fast and Slow’ concepts can be translated for the benefit of Irish readers:
The Halo Effect: Once someone becomes angelic in the eyes of the media/commentariat, they can get away with any old shite.
Any translations out there for the Availability Bias, the Cognitive Bias, etc.?
But back to Piketty’s tome; I’ve leafed through it in many bookshops and it is very readable but I can’t see myself buying it or being interested enough to read it in its entirety. I can’t see though why he just didn’t present the facts and let others argue over the implications. I think he may also fall into the trap of the ‘celebrity economist’ and be asked (and will give) his opinion on Ireland v. France in the Six Nations next year, the best shorts to wear when cycling and how to make a great Caesar Salad.
ok, fair enough, but my core point stands.
Even taking out the assets, it’s still as Ronan says subsidising leverage.
It’s giving a discount on tax to people borrowing money, and given that it is debt that has driven so many people under and fuelled a housing bubble, I have absolutely no idea how we could stand over that.
As for my mate, I’m almost certain he was PAYE at the time, though later he did run his own business. But we’re not dependent on him. The country is littered in landlords – many of them in arrears.
…many of them in arrears but still collecting the rent and not being foreclosed on because that might lower property values and we can’t have that.
Funny how moral hazard is invoked only when rich people might be called upon to pay something.
Thanks for the update, and to hear about the Tasc event happening of Friday. I’ve a lot of thoughts on this. I’ll try to put them together in some way, if I get around to it, but I’ve read the initial blog entry fully above, and it did give me some things to think about. BOH.
Does he not know Ireland is the ‘best small country in the world…’ to have a mortgage, as there’s a low or at least very very slow downside to not paying it? Someone should tell him about the national ‘Keep people in their family homes or with their BTLs’ policy. (Note: this policy doesn’t apply to anyone renting because all politicians know you can’t rent a family home)
I think the country has subsided mortgage holders enough. Ireland of all countries should be discouraging mortgage debt as much as possible, as our recent history has shown it’s the state that picks up the tab if the resultant leverage proves too much for the occupant to bare at some future point in time.
Incidentally why not increase Property tax as a response measure to rapid rise in property prices and resultant danger to our hard won ‘competitiveness’? Or have a separate tax on mortgages. A discourage over-leverage tax, anyone?
btw, the bank did take all the BTLs of this guy and while he’s kept the family home he still has the negative equity to pay off the BTLs. It does happen.
I mean, “from” this guy..
The country needs to raise more revenue because of the boom that blew up in our collective face. Property tax is neither a fair or honest way of doing this. There seems to be some weird idea that people pay LPT with some magic income steam. People pay this from their after tax income so it is just that an income tax that is taking even more money from people but pretending it is something else. It is not, it is income tax in all but name.
Just like bin tax, road tax, VAT and all the rest of the tax add ons that we have in this country it will rise and rise. When the government fails to achieve it direct tax targets it will raise this one to get them over the line.
FG hope to go into the next election and tell folk that they have not increased direct tax on income, but they have in real terms and they have been sly about it. All the levies and all the charges that they have imposed on people are taxation in the end on income and anyone who say they are not is deluded. It would at least be honest to increase PAYE tax but they like to say it would affect the labour market, well LPT and water are having a very negative employment but it’s best to just pretend that they are not.
As you admit the income has to come from somewhere. So it’s either put directly on labour which would keep more people on the dole or indirectly somewhere else. I vote for somewhere else.
Property owners gain from state spending on infrastructure. A house on an island with no infrastructure would be worth very little, maybe even less than nothing, the infrastructure/services are added by general taxation, so every citizen, including the renters are inadvertently adding value to property. The tax recoups a very small portion of that value.
As I understand it there’s no such thing as road tax, there’s a tax for owning a motorised vehicle (above a certain size) which is based on the level of carbon emission said vehicle emits. Either way it can be avoided by people with income. I for one don’t own a car and have an income. So it can’t be called an income tax.
If waste disposal was free at point of access we would get far more waste. Why not tax it, we need the revenue and we need to waste less. Same goes for water charges.
VAT is good and bad in my book. It’s regressive but as most of the stuff we consume comes from abroad, to abolish it would help others more than us.
The words of Lloyd George on the issue of property tax rings down through the ages:
From his Limehouse speech:
“The fraud of the few and the folly of the many
Not far from here, not so many years ago, between the Lea and the Thames you had hundreds of acres of land which was not very useful even for agricultural purposes. In the main it was a sodden marsh. The commerce and the trade of London increased under Free Trade, the tonnage of your shipping went up by hundreds of thousands of tons and by millions; labour was attracted from all parts of the country to cope with all this trade and business which was done here. What happened? There was no housing accommodation. This Port of London became overcrowded, and the population overflowed. That was the opportunity of the owners of the marsh. All that land became valuable building land, and land which used to be rented at £2 or £3 an acre has been selling within the last few years at £2,000 an acre, £3,000 an acre, £6,000 an acre, £8,000 an acre. Who created that increment? Who made that golden swamp? Was it the landlord? Was it his energy? Was it his brains – a very bad look out for the place if it were – his forethought? It was purely the combined efforts of all the people engaged in the trade and commerce of the Port of London – trader, merchant, shipowner, dock labourer, workman, everybody except the landlord. Now, you follow that transaction. Land worth £2 or £3 an acre running up to thousands.
During the time it was ripening the landlord was paying his rates and taxes, not on £2 or £3 an acre. It was agricultural land, and because it was agricultural land a munificent Tory Government voted a sum of two millions to pay half the rates of those poor distressed landlords, and you and I had to pay taxes in order to enable those landlords to pay half their rates on agricultural land, while it was going up every year by hundreds of pounds through your efforts and the efforts of your neighbours. Well, now, that is coming to an end. On the walls of Mr Balfour’s meeting last Friday were the words: ‘We protect against fraud and folly. So do I. These things I am gong to tell you of have only been possible up to the present through the fraud of the few and the folly of the many’. “
This is all a lot more complicated than it looks.
If you take national debt, it is all owed ultimately to individuals. We all could wake up tomorrow with a fit of amnesia and some broken computers and the national debt would be eliminated. Off course their would be some bankrupt bondholders but we all care deeply about them don’t we.
In the past governments inflated way, deliberately or otherwise the national debt or defaulted, printed money etc. to reduce the effect of the debt on the national finances.
We now have a situation in Ireland where nearly half our income tax comes goes to pay interest on our national debt. And that is in a low interest environment. We cannot print money, inflate or default. In effect income tax has become a transfer mechanism to transfer wealth from the earning citizens to a class sitting there with a couple of sheafs of legal papers and a good few binary digits on a bank computer somewhere. That is the whole point of Pickertys book.
We now have to consistently run down public services to pay for this transfer and increase taxes simultaneously to transfer wealth from the earning multitudes to capital owning bondholders. Good luck with that!
The property tax is just another tax but unfortunately it is highly regressive and as Pickerty has pointed out has no ratio to net not gross wealth. It is also highly regressive hitting the poorer sections harder as a percentage where you now have in the U.K. according to a recent report taxes lower earners harder – an anti-regressive tax system.
In all of this Ireland has not much wiggle room at all. Default on debt and the system as it is collapses, we all hate inflation because the Germans have told us so – leading to a situation where Germany’s net foreign earnings are gradually building up to a level approaching the colonial tax the UK and others charged on the rest of the world prior to the world wars – why because of their high saving rate and productivity. We also have high productivity but most multinational “savings” are owned by them and ultimately their shareholders.
In a low inflation environment all we can do is invent more taxes and gradually run down education, health and social transfers as is happening. The upturn may allow more wiggle room but may not last if their is another oil price jump, or A, or B as we are all warned by the IMF etc.. We did not however have to come up with a highly regressive tax in this situation and whereas I agree with the sentiment of a property tax for all the reasons given I think it should be made regressive (So a 1 million mansion pays a higher percentage than the 120,000 Semi-D in Cork), takes into account net property wealth and ability to pay.
Otherwise we are just adding to the problems of massive transfers to the wealthy from the working population and we all end paying for those yachts in Cannes with hospital beds.
It is simply not credible to make the argument that property tax (a tax on ownership, and thus a wealth tax) is regressive. The UK report is about the occupier-based rates system in England & Wales, which is indeed regressive because of its structure. But remember, it is not a property tax, it is a very odd system of charges on residents.
Remember, the poorest third in society do not own their homes. Property tax is more progressive than income tax and certainly more progressive than VAT (which is in many instances quite regressive).
I sense, but I might have this wrong, that when people on this blog say a tax system is “progressive” they mean that it is good and when “regressive” they mean bad, and of course the actual words themselves convey that impression.
I prefer the terms “socialist” for progressive and “entrepreneurial” for regressive. Or simply refer to the level of redistribution, so that a progressive system would be more redistributive than a regressive system. There should at least be a sense that there would be a limit to how redistributive a system should be whereas some might get the impression that there could surely be no limits on progressivity.
“we all hate inflation”
What’s this we business paleface?
Agree with everything Jules said except this: “In a low inflation environment all we can do is invent more taxes and gradually run down education, health and social transfers as is happening.”
The running down of education is anything but gradual. What’s amazing to me is that, for example, third-level students and their leadership are apparently cool with student-lecturer ratios of 25:1. Ask them to pay fees and they’re out on the streets. Ask them to allow the educational process to be eroded to third class status and they’re fine with it.
… and it looks like wars are profitable …. for an elite few in capital … and disastrous for most others …
Great to see that the true blue ‘strong farmer’ mentality reigns supreme … spose a ‘land tax’ is out of the question now that all the ‘poor dears’ are on EU Welfare or punting for the financial system …
I much prefer ‘SiteValueTax’ ….. it makes more ‘sense’ …
Spose the influential landlord and strong farmer class were too influential …
Denmark: In Denmark, there is a system of three property taxes, one on land, one on property and one specifically on commercial property. All three taxes go to local government.
The land tax is based on the market value of land, with an option for deferred payment for those over the age of 65. The rate is set by the particular local authority and varies from 1.6% of the value of the land to 3.4%. There are also ceilings for the annual increase in the land tax paid (7% during the 2000s). Since 2003, property–‐level valuations have been carried out every two years, with indexation in the intervening years. These valuations are done by central government.
A staff of 210 administers the system for Denmark, which has 1.9 million properties. (The 2011 Census reported that Ireland has 2 million households.) Landowners can appeal a valuation withinthree months and 85% of appeals are resolved informally. In 2002, 2% of property valuations were appealed, of which just 6,000 (0.3%) ended up being arbitrated formally; only ten ended up in the Courts system.
The entire valuation system in Denmark costs about €20 milllion to run per year about 1.5% of the total amount of annual land value tax revenues, which are approximately €1,300 million. [link above]
Should sort out some of that infamous 2 Billion !!!
Re: Property Discussion
@ Ronan Lyons,
What I often find amusing, at times, coming myself from the world, of property professionalism in Ireland, going way back to the early 1990’s, . . . at how different, the conversation about property amongst trained property professionals, . . . is from the discussion about property, amongst the public at large.
Bear in mind, it is the public at large (and very rarely the property professionals), who happen to be the ones who actually possess a lot of the wealth, with which to acquire property, develop property, enhance property, . . . and put ideas in action, . . or to ‘add value’ as the expression goes, anywhere, where property is concerned.
I can recall back in the early 1990’s one time at the Architect’s Institute of Ireland, a mini-conference was held in order to discuss (amongst the professionals), the dismal state of residential building design in Ireland, at the time. After about an hour or more of debate about the evils of bungalow, mentality in Irish society, and our total lack of awareness of good design in housing, . . . one professional, did allow the cat out of the bag.
He asked the question, how many attendees at that debate even had access to the finance needed in order to build the most basic bungalow building, which we all had spent an hour lambasting. There was a deafening silence around the room, I remember, and that one observation was enough to bring all conversation and proclamation to a very abrupt end.
One very good example, because Thomas Piketty, from my understanding does bring the whole topic of corporate taxation policy into his writing and work, . . . and it is an example from the same period (1980s and early 1990s), . . . is of the founder of Apple corporation, Steven Jobs. Read any biography of Steve Jobs, and you will encounter the efforts that Steve Jobs made, after he had acquired his considerable wealth in the 1980s, in order to hire a variety of different builders, architects and guru’s about design in general, to teach him what he felt he needed to understand about housing design and building.
Again, note the sequence of events there. The creation of wealth, then leads on to the hunger for awareness, which in turn leads on to the seeking of expertise, . . . and as a consequence of that, expertise and capital mix and merge together, . . . in ways that aren’t always very clean and coordinated (you try and be an architect to a billionaire some time).
There is a diagram that is often used to describe our hierarchy of needs, that is often cited, a triangular pictogram, which was designed by Abraham Maslow in a paper in the early 1940’s, which comes quite close to describing this process that I mentioned. BOH.
Re: Scandinavian Influence
What I can confirm, is that amongst the small community of property professionals themselves, there are two very strong halves to it. Ronan and his colleagues on his side of things, are probably closest to the money, that tends to wind up getting invested in property. But the other half of the property professional community (the kind who could never afford to build a bungalow, who are sort of like the seamstresses who always sewed the beautiful gowns, but were never invited to the ball themselves), . . . do frequently share an outlook, on taxation policy, which is interesting.
Way back in my days in architecture school, one of the things that was considered to be a real treat, was an excursion to Scandinavia. It was a place that many designers in the property professions idealized. It was a country in which Ikea, and nice kitchens, and warm homes were a thing that many people enjoyed (in contrast to the decrepit bungalows, that seemed just out of our reach, on the green isle). The thing about Scandinavia, we came to understand, was the high taxation of wealth, the availability and quality of public amenity, and the general awareness of design and sensitivity for the environment, which was around you, in those countries.
Fast forward to the 2000’s decade in Ireland, . . . and I was privileged enough on several occasions, to visit some of the properties that some of my old colleagues, had actually managed to provide for themselves, . . . after years and years of gazing at picture books of Scandinavian design on coffee tables.
The one thing that was intoxicating, about the Celtic Tiger, period in Ireland from a design professional’s point of view, was the access to capital that it gave to many real masters, . . . to somehow finally, realize their vision. It was like that fairy tale young lady (whose name I can’t remember), who finally got to go to the ball (and something happened with a magic slipper, . . and somehow it just all ended, very badly.
Because that is what happened in Ireland five, or ten years ago. It was an unholy concoction of great ideas, mixed up with free access to finance, for people who didn’t even understand finance. It was full of good intentions and application of skilled labour. Back in the old model, where someone went off and founded a corporation, and then went around legacy shopping, for the finest architects, . . . there was some clear separation of the different roles. One guy knew investment, and puzzled over ways to add value. Another guy, was just ‘around’, like the gifted seamstress to supply good ideas ‘on tap’. BOH.
Re: The Future
My honest assessment, is that we might be entering a new chapter in human history, where artistic ability and financial patronage of the same, might not happen in clear separate boxes any longer. That is my suspicion. It is going to make a lot of things, a lot more challenging however, . . . as artistic people may have greater access to their own capital, and wealthy citizens may enjoy greater freedom to explore their own creativity. I don’t know exactly how that will turn out in the end, . . . but I do know, that it will require far greater amounts of responsibility and sensitivity about the world, exercised by people in both counts.
You see, you look at the Scandinavian model, which my old colleagues were in such awe and admiration of, back in those dark times in the 1980’s and 90’s. What the Scandinavia’s had was a mixture. They had a mixture of quality and afforability, they had low debt and high taxation.
What actually happened here in Ireland, during the 2000’s, . . was that we borrowed through the nose, in order to finance the idea and the aspiration. Then having extended ourselves, far beyond, what was our extreme limit, in terms of what we could afford to invest into property, in order to add value, . . . we discovered that our tax base was horribly narrow and unstable, . . . and we ended up with the International Monetary Fund, arriving in Dublin on one cold and frosty morning in the month of November in 2010, . . and tell us, that we’d all have to trump up a little bit more, in order to provide a broader tax base.
In one sense or another, you trace the history and culture in Ireland, right back to the twenty five and thirty years ago. All of the ingredients, had existed then for what happened subsequently. But what is important, is the sequence in which these things are delivered. We wanted the good design. Fine. We wanted acces to finance, in order to get better design. Well and good. But what we discovered in Ireland, to our extreme horror, was that in going in pursuit of those first too, does require one to implement in the right sequence. You kind of have to chase after better things, and creation of more wealth, more comfort and more well being, . . . but do it in such a way, that everyone is going down to the local furniture superstore, in order to furnish their newly built, cutting edge Swedish bungalow, . . max-ing out your very last piece of plastic, . . and that you actually leave sufficient slack in it all, to achieve that broader, deeper tax base, that those Scandinavian countries also require in order to operate in the manner, in which they operate.
We’ve ended up with all of the same ingredients, give or take, in Ireland. But we just didn’t acquire those things, in the sequence, which would impose the least pain upon society as a whole. BOH.
Re: The Railways
My understanding is that in his research, Thomas Piketty, makes reference to the period leading up to the beginning of the first world war, was a time in which true inequality did exist in north American society, in particular. It was also a time in which great fortunes were created it must be added. We have nothing today, that even remotely matches the extent of wealth that was amassed on one end of the spectrum, in the new world in the later 19th century. The billionaires list of today, just doesn’t come close to it.
What you will also recognize though, in the history of the 19th century in America, was that it revolved very much around the railways, and the struggle to gain an upper hand, between those folks who controlled and developed various aspects of technology and finance, to do with railways, . . . Vanderbilt, Carnegie, Rockefeller, Morgan.
These guys were literally buying presidential elections by the time of Teddy Roosevelt, in the early 20th century (Teddy had been appointed as vice president, in the hopes that it would somehow neutralize his political influence). You actually had a period of great reform of public services, in the years of the Wilson presidency, leading up to the beginning of the first world war (this was when the system of Tammany hall politics was challenged briefly in New York city). That early reform movement died or was snuffed out, leading into the first world war period in America.
But what you notice in America again, was the sequence, of things happening. Development and finance was growing and expanding at rates, faster than which society and rules in general, were able to keep up with. It was a real time, of Hell on Wheels, with the portrayal of the Colm Meaney’s character in the series. What was of course, most dangerous about Durant’s character, was that combination of access to enormous amounts of finance, . . . combined with a world class engineering, technological and management talent.
And you do find that right across the host of characters in the real story too.
Rockefeller’s understanding of chemistry, Carnegie’s appreciation for metallurgy, JP Morgan’s fascination with energy delivery and marketing, and Vanderbilts interest in finance and building of large organisations. And all of these characters fought with one another, fed off each others’ ideas, and actually Carnegie ended up selling his company lock, stock and barrel to JP Morgan in the end of it all (following years and years of aggravation, they were able to make a deal).
The one thing that many of these characters also had in common with each other, was that having such centralized control over large industries and resources, was actually a good thing. If one ever reads Daniel Okrent’s history of the Rockefeller Centre construction by the son of the famous oil baron in the 1930’s at the height of the great depression, . . . what you will find is that JP Morgan’s company U.S. Steel, had almost gone out of business completely, but for the order to complete the steelwork for that one major project in uptown Manhattan.
It is not at all dissimilar today in Ireland, in fact, to the few last remaining general building construction companies, that are left in Ireland, . . . would definitely be gone out of business too, . . except for a few key Health Executive and Capital Investment projects around the island. These, by the way, were companies in Ireland who had turnovers in the region of a billion euros as recently as 2008.
But we talk about multi-national corporations today, and the executives who run these enterprises, . . . and take even the largest and most powerful of them, . . . and you would still need to multiple that person by fifty at least, to get anything like a Carnegie or a Rockefeller in the heydays, of the late 19th century.
But make no mistake about it, here in Ireland, it was that very same toxic combination of ideas, effort and access to capital, which did lead to a lot of things, . . . and for a time at least, we managed to create our very own, minor version of a hell on wheels. BOH.
@ Sarah Carey
I recommend you listen to the Primetime interview with Pikkety. He’s a bit lefty for me but came across extremely plausibly.
The IT article quotes him accurately but completely out of context. He is promoting a net wealth tax to counter the seeming inexorable trend for those who own wealth to earn more on that wealth than the growth in the economy and therefore to become ever more disproportionately wealthy.
He was not saying that our property tax should allow for any mortgage. He was saying that a property tax is far too narrow, what is needed is a net wealth tax. He is far to smart to be advocating a system which subsidised leverage.
People before profit
Ronan Lyons began by raising the point about subsidy of leverage, in his initial blog.
I have often raised the point myself, that we do need to be careful in Ireland, as a country, about this idea of raising finance in order to do a lot of projects, using a high proportion of debt finance. There is always a temptation, based on the small size of the island, to fill too much of the balance sheet using debt. You often hear the argument made, by quite intelligent politicians in Ireland, . . . statements like it doesn’t matter how much money we borrow, it matters the rate at which we borrow at.
We don’t do enough in Ireland, in order to explore other means of raising capital (other than selling our debt paper on the international markets), to put to use in projects that we wish to undertake.
But we do talk an awful lot of nonsense, too, when it comes to our banking system, about the need for a healthy banking system, in order to fuel the development of our economy by giving business adequate supply of credit.
What we fail to remember is that banks, are no different from any other profit seeking multi-national corporation. What banks do, because they are corporations, is they create wealth for their equity holders. That is what the primary purpose of a bank is. It is first and foremost an enterprise, and is not in a business of providing a service, as a kind of public good.
We are currently holding a banking inquiry, in Ireland, . . . and many, many detractors out in the electorate, believe it is a waste of time. What could we learn, that we don’t already know?
What does surprise and shock me actually, is that property professionals seem to be amongst the strongest, in terms of holding that view, . . . Paul McNieve, in yesterdays Irish Independent, commented that a banking inquiry is a waste of the public’s money.
I would wish to offer a different opinion to that, if I may. What one often hears in the people before profit, polemic in relation to extraction of fossil fuel resources, within the maritime boundaries of the state, . . . is that we should strike a better deal on behalf of the state, . . . with the profit seeking corporations, who wish to drill within our boundaries.
It is a very valid and well articulated argument, that many in people for profit, have been making for years and years. But maybe it is something to do with the fact that oil and gas, is sexy or something, . . . because for all the effort and energy that people for profit, Kieran Allen, and very many other voices in public opinion seem to like to devote to that subject, . . . they never seem to have articulated their argument in such a way, as it applies to banks as corporations (with shareholders, and return on investment, etc, as with the energy multi-nationals). BOH.
Oireachtas Banking Inquiry
The real question that any banking inquiry, on the island of Ireland needs to go back to, . . . is that it all started in the dark and dismal later years of the 1980s and 1990s as I mentioned above. It started when we had a vision, we had a project before we ever had a means of making the project a reality. Back in the darkest days of the 1980s, . . the ideas, that we had in Ireland was like the oil and gas, stored in the ground, that people before profit, always talk about now.
But what we did do in the 1990’s in Ireland (and this is where it is very important for the banking inquiry in the Oireachtas to look at), we struck a deal with a corporation (namely, the Irish banking corporations), . . . for how we would divvy up the proceeds that were generate, . . . as a result of extracting those ideas, out of the base earth and geology, from which they came.
In other words, in Ireland, in the 1990’s, we struck a deal, that ensure that most of the proceeds would be funneled down through a particular avenue, that suited the equity holders of the banking system in Ireland. And these equity holders aren’t namely, faceless creatures either. They are people amongst us, who had wealth to their name, in every parish on the island of Ireland. They were the well got, in many cases yes. But they weren’t people that remotely different from the average Joe.
And furthermore, these equity holders of the Irish banks, in the end, even though the policy was completely in their favour, . . . they were left without a single farthing, by the end of 2008 and 2009.
It did not work out well in the end for Irish banking equity holders, or for society in Ireland at large. We didn’t get a Scandinavian, type of society, as all the ‘architects’ who had the ideas to put in to play, many years ago had hoped for. And this is what I mean about extraction, of resources, and the point that is often made by people before profit, . . . about fossil fuels, . . . but they rarely seem to have a capability to apply that exact same logic to our banking system, and our property finance system in Ireland.
What you almost need to do, twenty years in advance, in the 1990’s, is to strike that deal with the corporations, whose business it is to mine and extract the resource, . . . the wealth, . . . whether it be a bank, or a mining corporation. You need to strike a policy, and a deal, between society at large, and the private enterprise.
This is the only way, that you can get to that finely balanced, optimum, of availability of public services, broader tax bases, affordability of lifestyle and the utilization of valuable resources, . . . be they ideas, or natural resources, or whatever else.
What we did in Ireland, the deal we made with our banking corporations, was we create mountains and mountains of debt, we over-built property, and we left ourselves with an inability to tax ourselves enough, in order to pay for the things through the public system, that are best paid for through the public system. Someone, somewhere, knows how this deal was concocted and construed, and how it ended up becoming so one-sided, in the banking corporation equity holders’ favour (and those people lost everything as well, and as a consequence, they too need some answers). BOH.
Ruairi Quinn reference
It’s only something in passing, but I figure it is best to throw it out there. Ruairi Quinn was actually a trained property professional himself, and a man who has studied socialism in Europe and Russian, since as long, as most people have been around.
Long before minister Quinn ever did take office in 2011, as minister for Education, . . . he was another one of the opposition members, at the Oireachtas, . . . who featured on radio programs, and offered very sound intellectual argument at times.
In fact, his arguments were not all that radically different, from the ones that one hears from people before profit, in Ireland today.
One very good reference, which I can recommend, and I know it is a work that Ruairi Quinn did hold in high esteem, . . . (at the time in Ireland, when we were going through something called the Celtic Tiger), . . . is The Affluent Society,by J.K. Galbraith.
It did appear obvious to Quinn at the time in Ireland (and I presume others, who had much more developed skills of observation and analysis that I had), that what we had was private affluence, and public poverty.
That was the policy direction in which Ireland had been led. One of the primary motivating factors, therefore for someone such as minister Quinn, during the Bertie Ahern, years was to remain around long enough, in order to present some alternative, to the Irish public. But it should be emphasized, that the Irish public at that time, seemed to have been quite satisfied in large measure, . . . for the policies that had existed at that time.
As a people in Ireland, we have to own that now.
But I would suggest, that for the banking inquiry, in the Oireachtas at present, . . . it is vital to talk the statements of those who were opposition deputies, . . and opposition shadow ministers, of various kinds, at the time in Ireland when Bertie Ahern’s Fianna Fail administration did appear to dominate so much over the Irish political landscape. BOH.
I put a report on the other thread of the TASC event.
If anyone else was there I’d love to hear their perspective.
Irish Public Health Care System
Just to make one final point, or conclusion on the above.
Take one of those quite large items, which tends to be purchased en masse, via the public purse, and paid for your our various forms of taxation, . . take the health care system. It has become the subject of much debate in Ireland, with Joe Duffy’s program featuring it all this week again. The public accounts committee chairman, Fianna Fail’s John McGuinness made an issue of budget control in health services, which was debated at length last weekend.
Thomas Piketty, speaks about large financial assets, and large financial liabilities existing today, that were not in existence in the 19th century, when property taxes were first invented.
What we discover in healthcare, in Ireland, is one of these massive portfolios, or massive liabilities, which Picketty spoke about. I suppose that we can all take it, than in Ireland at least in the 19th century, we didn’t have much of a healthcare service liability, . . . because the workhouses, the precursor to the health boards, came into existence only a decade before the great Irish famine of 1840’s.
Last weekend, in Ireland, the pointed criticism from PAC chairman John McGuinness, drew a response from government deputies that I hear mention, there were very few financial professionals actively involved in controlling and managing the budget of tens of billions over several years, . . to keep the healthcare system in Ireland running.
I think the point was made, in conversation last weekend in Irish media, that if a private corporation was involved in the spending and management of this sum of money, . . that there would be teams of financial controllers involved, . . of the kind perhaps, that Thomas Piketty described as the super-managers, in his writing.
The Irish Labour party is the oldest political party in existence on the island of Ireland. In my opinion, the Irish Labour party, ought to have a real interest in the Oireachtas banking inquiry, on-going at present.
It is no doubt interesting that in Ireland, one of the ways in which we moved towards a model of private affluence, coupled with public poverty, . . . ironically, seems to have been through the exploitation of that relationship that existed between politics and the largest labour unions on the island of Ireland.
There was one prime example of it, at the height of the Celtic Tiger era in late 2006, where the Taoiseach, one of the largest borrowers of one of our non-dissolved financial institutions, . . and a number of leading representatives from the labour unions sat down together in order to broker a compromise and a deal, . . in the middle of the Irish healthcare system.
This was a perfect and living example, of the facts mentioned in Irish media, in last weekend, of where the accounting systems, supervision and skills do not exist, in our public service in Ireland.
It becomes easier to broker an over-night deal, amongst the most unlikely of participants, . . than go and find some of what Piketty describes as the super-manager, class in order to give adequate oversight of finance.
A very clear account of these events, ought to be obtained by the Oireachtas banking inquiry, I imagine, . . . and even if it means overturning rocks in a particular pond, which the Irish Labour party would perhaps rather not turn over.
There is nothing simple about Irish politics it must be admitted, and especially of that politics during the Celtic Tiger period, when so many of the plans, . . . for example a plan to build a national childrens’ hospital, somehow never got executed, . . . and the strangest thing about it, was that the very party and oldest party on the island, who appeared to understand what the best policies ought to have been, . . . also became the active conduit, through which we saw so many of the sweetheart deals taking place.
I think an awful lot of the ability or otherwise, of the Irish Labour to sustain itself further out and beyond the 2016 general election, . . might largely depend upon their level of courage, and ability to confront aspects of their past, . . and involvement in the ‘thick of it’, during the Celtic Tiger, which they might prefer to forget. BOH.
Property tax serves two very useful functions. First and foremost is that it is a stable source of income for government. Second it reduces the price of housing due to the simple fact that the mortgage lender factors it into the affordability calculation. There is a minor third function in that it reduces the number of unoccupied buildings due to the fact that while they sit there cost free now, with property tax they become a burden.
In general Irish people do not do their sums when it comes to taxes. Added to that they do not trust the politicians that they eagerly vote for. There is deep seated and widespread opposition to property taxes among the people I talk to. First they see it as an added cost in isolation and they envisage the very politicians that they voted for as having more of their hard earned money to waste.
In most countries property taxes are local taxes levied by local and regional governments and used to provide services that are local. Local roads, streets, water, sewage, schools (primary and secondary}, welfare, public health. In some cases the national gov’t cost shares ( according to a nationally agreed to formula) but in all cases the local gov’t collects and spends the property taxes.
One anomaly in Ireland (and Britain) that needs immediate attention is that partisan politics are deeply embedded in local governments. There is no useful function for political parties in local government and particularly as it relates to the cap in hand routines so common in Ireland in the relationship between the national and local gov’t..
We have to stop thinking of property tax in isolation and look at how it can fit into the wider tax and gov’t scenario for the common good. That means one must take into account property tax, capital gains tax on real and other property plus investments, earned and unearned income tax, sales taxes, fees. If your property tax goes to local roads, water, sewage and schools instead of into the general revenue envelope in Kildare Street your thinking might change. The beauty of Irish gov’t is their lack of cohesive strategies in that at the same time they are implementing property tax they are divorcing water/sewage from local gov’t and forcing it to marry national gov’t. (Is this because Brussels decided to pick up the tab.). Farcical describes it best.
Look at property taxes as funds that would have gone to landowners, developers, banks if not used for local essential services.
I will spare you now by stopping before I get carried away.
Wouldn’t a net wealth tax, through the magic of rational expectations, still discourage leverage? As you put it:
“there is a fundamental difference between a renter and a mortgage-holder: only the latter is buying a ticket to future wealth”
But that future wealth will be taxed by a net wealth tax. Also, there are surely plenty of alternative policies to restrict leverage, notably through regulation on the credit-supply side?
Re: Greed is Good
I had time to listen to some conversation on national airwaves this morning. It was a lot to do with Thomas Piketty, about (the markets) financial oligarchy and about politicians needing to reclaim the power, away from the oligarchy. There was even some talk about fiscal irresponsibility having gotten Ireland as a country in a mess, . . and there was chat about America, in which right wing newspapers have blamed a lot of problems on the poor. One commentator went so far as to observe, that inequality had replaced racism as a number one issue in America.
The point about fiscal irresponsibility (in the past), . . . and the need to maintain austerity budgets in Europe, . . . is an interesting one.
The Oireachtas banking inquiry, will no doubt have to look into this topic, . . . and one can almost write a script for what defendants of policy during the Celtic Tiger years in Ireland will say. They did exercise fiscal responsibility, they did achieve balanced budgets, and indeed they generated surpluses even in something termed a national pension reserve fund.
All of that seems like a century away now.
The points raised about a financial oligarchy and an opposing weakness, on the part of politicians is interesting though. The fact, that we need to remember, is that in the modern era, . . . we have to realize that financial institutions have become much more adept at squeezing taxes out of the population of Ireland, . . . than governments ever were.
People seem to refuse much less, to pay an additional one or two, . . . or indeed, three or four, hundreds of thousands on top of the eventual cost of acquiring a home, . . . than they would, in paying a fraction of that amount extra, in taxation.
As high and all as the cost of owning property in Ireland became, far less people openly protested against that particular injustice, than people would have done, had they been expected to pay a far smaller amount, towards providing public services and public amenity.
Because people feel, rightly or wrongly, that if they have to pay an additional hundred thousand in mortgage interest repayments, . . . that that money will eventually accumulate towards their own personal store of wealth, in their old age.
People just don’t feel that way, if their money goes towards paying taxes. They feel as if, it is wealth that has been stolen from them. BOH.
Re: Balancing the Books
So how did three successive Fianna Fail administrations exercise fiscal responsibility, and balance the budgets for so long, . . . even producing surplus revenues?
Taxation monies were sourced, from exactly the same source as the residential mortgages. From the banks.
In other words, taxation was ultimately paid to the equity holders in Irish banking institutions (and foreign banks), as part of principle and interest payments through residential loans.
What did the equity holders of Irish banks do with their dividends then? Well, equity holders do, what equity holders are entitled to do. They purchase lots of apartments in Turkey.
The thing to consider about equity holders, of banking institutions, is that they are less likely to do things, like building of hospitals in Athlone, or national Children’s hospitals in Dublin, . . . using their spare cash, as the Irish state is more likely to do.
By collecting property tax, at the point of transaction, you are effectively paying the property tax, to the shareholders of the bank.
You are not paying it to government.
Collecting property tax, at the point of transaction where Irish people purchased them self a residential property, . . was very easy to do, . . because people felt that that form of property taxation, somehow added to their own personal bottom line.
When Irish people pay taxation to the Irish state, the one thing that they don’t have any guarantee of, is that they will ever see that money finding its way into the provision of services that they need.
What Irish people believe, will almost certainly happen, is that layers of upper management tends to get added in all of the big spending centers of the Irish State, and from there the money is quickly funneled into exorbitant salaries of chief executives, and chief executives’ pensions.
That is almost a certainty. BOH.
Re: Special Purpose Vehicle
In other words, it is as well to give taxation collection, to the shareholders of banks, and allow those shareholders to buy apartments in Turkey, . . . because one way or another, the money would never have ended up in a new hospital in Athlone anyhow.
By taxing property at the point of transaction, the Irish government wasn’t imposing taxation, . . but instead it was borrowing.
The government was using off-balance, sheet borrowing, in order to balance it’s books (and even generate so-called surpluses, that accumulated in the national pension reserve fund.
Irish residential mortgage holders became as a collective, a special purpose vehicle, of the Irish government.
Transactional property tax, was a good trick, and in a way, it might never be beaten again.
It did enable the Fianna Fail government to borrow vast quantities of money, off of it’s own balance sheet, and do so in a way that was not politically unsustainable.
As long as property prices rose, everyone was happy.
As long as the public kept on buying property, . . the Irish government had gained access to a deliver mechanism for cash, that just couldn’t be beaten. It worked, up until the point it didn’t work any longer.
Now, the special purpose vehicle, has gotten into trouble, as the value of the assets on its books have fallen. The SPV collectively known as mortgage holders, gets drawn back in closer to the parent organisation, the Irish government, . . . and exactly where the Irish government, doesn’t want the SPV to be.
(The SPV says, we helped you out, now it’s your turn to help us out)
What you witness now, is a scramble on the part of the Irish government, to find all sorts of ways to sell the special purpose vehicle, to put distance between it and themselves.
The fastest and easiest way to do that, is to inflate residential property values in Ireland once more, so the SPV won’t appear as distressed, and then sell it off to investors.
Fiscal responsibility in Ireland, normally has something to do with an arrangement between politics and the financial oligarchy.
The taxation is collected at sales transaction points for large items, such as residential property, . . . and that taxation is paid to a banking shareholder, rather than to the Irish State.
And the trade unions by the manner in which they have protected their most well healed, members down through the years, have guaranteed this arrangement between the Irish State and the financial oligarchy, will continue.
The Irish government never collected taxation thorugh Irish property, . . . rather it collected vicarious borrowings.
The ex. Fianna Fail leaders appearing before the present Oireachtas Banking Inquiry, will point directly to balance sheets which prove how well they were able to balance the books of the Irish State, when they were in office.
What one has to realize, was the unholy alliance that existed between banking, politics and trade unionism in Ireland. It’s going to be very hardly politically, . . . for the Oireachtas Banking Inquiry, to come to anything like that sort of conclusion. BOH.
Just coming back to this having read all the counter-arguments and the Piketty answer (here http://www.irisheconomy.ie/index.php/2014/06/10/tasc-conference-on-20th-june/#comment-523972)
Ok, I get the point that someone who owns their house, or the great part of it is “wealthier” than someone with a mortgage, but I’m sticking with my original opinion. We are still suffering the effects of a housing/debt bubble when people borrowed stupid amounts of money for houses they couldn’t afford. Anything that incentivises more of that crazy behaviour is a terrible idea. People should be encouraged to pay down mortgages not borrow more. Perhaps the Behavioural Ec. guys will have something to say about this but the notion of being punished for being frugal is mad.
I think the notion of taxing on house value is good. If you can’t afford the house, and can’t afford to maintain a house in a certain area of a certain size, then don’t buy there. Live according to one’s means. That is the lesson of the boom and bust.
“..this but the notion of being punished for being frugal is mad..”
Whilst this may indeed seem mad when it comes to the Irish tax system it seems this trueism isn’t actual that true.
Think about Motor Tax for instance – those who didn’t borrow recently to buy or upgrade their older models are being absolutely hammered for owning and maintaining an older car – and being frugal at the same time. My Motor Tax has doubled in the past 5 years simply becuase I choose to keep and maintain an older car. And the waffle about Carbon emmissions is just that – waffle. The hard evidence that lower carbon emmissions changes car ownnership activity is fine and dandy if one has the means to do so. So the current structure of Motor Tax is both regressive and penal on frugality.
According to the current tax code I would have been significantly better off (in tax terms) in borrowing money and buying a new car than not.
So when it comes to tax rest assured nothing makes sense.
But I too stand by my earlier line – Picketty is correct – taxing a net liability goes against the tenent of all taxes, which seeks to extract from profitable enterprises. Being in a net liability position is the precise opposite of what any taxing exercise seeks to exploit. Harsh but true.
“Live according to one’s means. That is the lesson of the boom and bust.”
We must have lived through different booms and busts. The lesson I get is: don’t live according to your means. Borrow all you can and spend it on housing. When push comes to shove, nobody will foreclose and you can live in the property at no cost (or rent it out for pure profit).
Meself, I’m thinking about buying the biggest house I can get a mortgage for. After a few mortgage payments, I’ll stop paying.
Living according to one’s means (like working as a wage slave) is a mug’s game. That’s the lesson of the boom and bust, brought to you by Fianna Fáil, Fine Gael, the Greens, the Labour Party, the IMF, the ECB and the EC.
America is a very good example of how mortgage interest tax write offs distort the housing market. In the minds of most people it is something for nothing a bargain too good not to take advantage of. Instead of making houses more affordable it increases the price of houses. The gains go to the developer/ builder/seller and offset the tax deductions. In effect the gov’t foregoes tax revenue which finishes up in the pockets of developer/builder/sellers. Affordability in the form of monthly payments drives the housing market in the same way it drives the car market (nothing down, zero interest, 8 years to pay). Gov’ts can influence house prices (downward) by making 25 yr term the maximum, 20% down payment, and no tax breaks. Another novel idea is having a flat levy of Euro 20,000 on all new housing units, payable to local gov’t to fund expansion of local services.
There is whole raft of things that can be done to put the costs where they belong, in the private sector not on the taxpayer.
But this is Ireland you say, where the taxpayers give it up in this life to save suffering in the next. A concept that has worked since 1922 must be right.
@ Mickey Hickey,
America is an enormous country, with some stark extremes to it, and contrast between rural and metropolitan regions. From a construction and development point of view too, it is almost a laboratory for all kinds of innovation to do with construction procurement and real estate finance, . . . many of those innovations very useful, and do get built into the system on this side of the Atlantic ocean.
But one thing that I do find it hard to wrap my brain around, . . is the sheer scale of things that they do undertake some times in America. For example, the coal industry in West Virginia as one example. Here in Ireland lately there has been a grave concern about wind turbines spreading all over the landscape, and it is felt that communities aren’t included in the process.
I watched a documentary, The Last Mountain, recently, about the mountain top mining for coal in rural parts of West Virginia. Apart from the noise, the environment destruction and the air pollution of these techniques, . . I thought that the most shocking thing, was it just poisoned the whole water system of Appalachian mountain range and catchment.
However bad things might get in Ireland, in terms of wind mills and in terms of poor taxation on property, . . it’s all just chicken feed, compared to the scale of operations undertaken in the coal industry in America, . . and what it all means for communities and homes. The fact that so much of the landscape had been blasted away too, ensured that in heavy rainfall, whole towns below would get flooded.
I had thought that this stuff, had happened back in the days of the early industrialists. One of the Kennedy family (an environmental lawyer), was interviewed several times during the documentary film, and he put the date when this all started to go wrong as being the 1870’s. That’s when people began to loose all say, in their environment and surroundings.
It is amazing though, how difficult it is in the modern era to exercise any level of control over the corporations in America, who extract this coal. They say that America is the Saudi Arabia of coal and all, . . but the thing about Saudi Arabia, is that it doesn’t have to blow up its mountain ranges in pursuit of the resource, as they seem to do in America. Anyhow, I can recommend the documentary movie. Its one thing to talk about property values affected in Ireland by the presence of wind turbines in the landscape. But in the areas where they engage in mountaintop coal mining in America, it appears that people can’t even drink the water any longer.
We have nothing like this, on that scale, in Ireland, . . . and we often do take the quality of life that we do have, for granted. What shocked me about the documentary too, was how little support that the people affected seem to have. BOH.
Corporations have bought and paid for American Gov’t, it is the law in general as it applies to all American Corporations that allows the activities you describe. With the environment being top of mind for more and more people everywhere, American Corporations have become concerned that they may be subject to more control both at home and abroad. The front line at the moment are the multinational trade agreements where th US gov’t are insisting on rights for US corporations at home and abroad that exempt US corporations from environmental laws, domestic and foreign. It is no longer the government not wanting to rein in irresponsible behaviours, it is trade treaty obligations that have tied our hands.
See here, existing and proposed:
West Virginia is a drop in the bucket of the US economy. However,coal looms large in WV and the state gov’t have long since sold their people down the river. Overflying parts of WV and PA I have seen never ending destruction on a scale that I still cannot get my mind around.
I am a firm believer that carbon based fuels will be produced until the resource is completely depleted.
This does not mean I am a supporter, but reality has to be faced.
“Perhaps more importantly, we tax property for a reason. ”
Real estate is taxed because it cannot be moved to a lower tax jurisdiction, even within Ireland. It is also easily taxed at the local level and it is the custom for property tax monies to remain at the local level.