Category: Fiscal Policy

Commission on Taxation: Property taxes

When I studied public finance in the late 1980s, stamp duties were presented as historical oddities: Simple to collect but so distortionary that they had long been abolished in the civilised world.

The Commission on Taxation recommends that stamp duties be abolished and replaced by a property tax. Impeccable.

In fact, the CoT recommends that the stamp duty on non-owner-occupied residential property be maintained. This creates unnecessary friction between the rental market and own homes.

The CoT also recommends that rezoned land be subject to capital gains tax. This is smart, treating land like any other capital, thus improving capital allocation. It would further depress the land market, though.

Returning to the property tax, the CoT recommends that house values be self-assessed. This creates a problem with asymmetry of information. In fact, the CoT immediately adds that the Revenue Commissioners would not have a clue about the value of houses. This part of the proposal would create the new national sport of property tax dodging.

It seems, though, that the political leadership is not too keen on the property tax. I would suggest that it’d be introduced in 2011 and that 2010 is used to build up a database for “objective” valuation of residential property. In other countries, the “taxable” value of a house is typically far below the market value (so that no one can challenge the tax person) while the tax rate is fairly high (so that revenue is not affected). Building up the data can be done in a year, and would actually employ a few recent graduates.

Commission on Taxation: Water charges

The Commission on Taxation recommends that water charges be introduced. High time. Giving away a valuable resource has never been smart.

There are two additional recommendations by the CoT.

Water charges should come in two types: Flat rates for those without meters, and volume-based rates for those with meters. If the flat rate would be set at approximately the average volume-based rate, then a substantial fraction of the population would have a reason to install a meter. If the flat rate is then adjusted to the average volume-based rate OF THOSE WITHOUT METERS, meters will soon be installed everywhere. If not, there will be a subsidy flow from those who save water to those who do not.

It’s a pity that water data are so poor that we do not even know the average drinking water use per household with some degree of confidence.

The CoT also recommends that local authorities be local monopolies in supply, and that the price be regulated, presumably by a new Commission on Water Regulation. Old habits die hard.

Commission on Taxation: Carbon tax

The report of the Commission on Taxation can be downloaded: http://www.commissionontaxation.ie/Report.html

This thread is on their proposals for a carbon tax. Others will open threads on other aspects of the Commission on Taxation.

The Commission on Taxation proposes a carbon tax. Here are some crucial elements:

Level: Roughly equal to the CO2 permit price in the EU Emissions Trading Scheme (€15.24/tCO2 today)

Scope: Non-ETS CO2 only

Revenue: Earmarked

On the level of the tax, with the carbon tax equal to the permit price, we reduce carbon dioxide emissions at the lowest possible cost. This is good. At the same time, the level of the tax is set by the market rather than by some politician. This is good too. There is the worrying suggestion of a floor to the tax, but this is fine as long as that floor is set low.

Scope: CO2 in the ETS is exempted as it should. Taxing CO2 in the ETS would be double regulation, and every tonne of CO2 reduced in Ireland would be emitted elsewhere in Europe. Non-CO2 greenhouse gas emissions are exempted too. This is the only pragmatic way forward at the moment, although economic theory strongly recommends that this exemption should be phased out at the earliest opportunity.

Revenue: The Commission on Taxation got it wrong here. They recommend that tax breaks for energy efficient capital be continued, and that companies in a voluntary agreement on energy efficiency. The tax break is double regulation. The Accelerated Capital Allowance on energy efficient equipment should be abolished. The voluntary agreements on energy efficiency should also be abandoned. Voluntary agreements are a weak policy instrument. The CoT essentially allows industry to choose between two regulatory regimes.

By the same token, the CoT does NOT recommend that other energy subsidies be abolished — particularly the Greener and Warmer Homes. Again, this is double regulation, unnecessarily increasing the cost of emission reduction and introducing distortions and opportunities for rent seeking. This is an opportunity missed.

The CoT does recommend that VAT on energy-efficient goods be lowered. This is triple regulation!

Garrett FitzGerald and the Budget Deficit

On Morning Ireland today, Garrett Fitzgerald again criticised the opinion article signed by the 46 economists. However, rather than focus on the article’s principle arguments about the government’s banking policy, Dr. Fitzgerald concentrated on what was essentially a parenthetical comment about the budget deficit. Among other things, he said:

Moreover, the statement made that we’re moving towards a deficit of €30 billion was quite irresponsible and that destroyed my confidence in the 46 economists.

Even leaving aside that the fact that the size of this year’s deficit is nowhere near the key issue in the 46 economists piece, is it indeed the case that this figure was irresponsible? One way to check is to look at the forecasts of that highly responsible body, the Economic and Social Research Institute. Their most recent Quarterly Economic Commentary, based on data available through July 9th, predicts an exchequer deficit of €25.7 billion.

Since then we have had the publication of the July exchequer returns (Irish Times story here) which saw tax revenues falling behind the targets set in the April budget. It would certainly not be extreme to add another billion or so to the projected deficit forecast on the basis of these figures, putting it at about €27 billion. To the extent that these shortfalls relate to unanticipated weakness in the economy, it is likely that social welfare payments will also come in ahead of target, perhaps pushing the projected deficit up to €28 billion.

Even ignoring the fact that deficit forecasts have been coming in too low now for some time, it seems to me that this is already enough evidence to justify the statement in the 46 economist piece that

We now look to be on course for a Government deficit of close to €30 billion.

Note incidentally, the sentence is projecting a deficit “close to” not “equal to” €30 billion.

I’m afraid here that, as with Dr. Fitzgerald’s claim that the piece failed to distinguish between different classes of bank debt, this criticism seems to be largely unwarranted.

The pity, of course, is that far more people read the Irish Times and listen to Morning Ireland than will ever read this blog. So, unfortunately, the damage to professional reputations done by being branded “irresponsible” and “destabilising” by a respected public figure will not be easy to undo.

Ireland in Recession: FT Analysis

John Murray Brown analyses the set of policy challenges facing the government in the Analysis page of today’s FT: you can read it here.