‘Bord Snip’ Chairman calls for Property Levy

Colm McCarthy, UCD economist makes the front page of the Examiner for his contribution to yesterday’s  conference on getting past the downturn. He is now chairman of the board charged with shrinking government spending and helping to target cuts in the public service. Interestingly he has a few things to say about the tax system as well.

He is in favour of a tax on property as a means of stabilising public finances, when Lenihan brough forward the levy on holiday homes in October I thought it was the obvious first step to instituting such a property tax, which is common in other EU countries and is a far more stable income than tax on property transactions.

I wrote elsewhere before that the tax system used to sustain a public service is woefully inadequate and focusses on middle class workers as the primary source of income. Through PAYE and VAT the government has easily administered taxes which automatically get taken out of income for middle-income earners and purchases made by every person in this country.

Unlike other countries Ireland doesnt balance this tax take with taxes on wealth and property (these tend to affect the wealthy). The focus on income to the detriment of other tax aspects has meant that the push to lower taxes (rightly in the case of over-abused PAYE workers) has left large gaps in the tax take. (See the tax take here).

That was augmented by the fact that taxes on property gave the state a vested interest in inflating the property market. Since the peak in 2006 property tax has fallen as a share of the tax take from 18% to 4% a clear indicator of where the rest of the income is going. Considering that property and consumption taxes were what allowed government to narrow its tax base elsewhere, by consistently coming in above expectations, there was little incentive to think about what happens in the bad times.

The commitment to financing public services is almost directly related to how much money the state can take from middle income earners. This system has benefitted from the Tiger years however in the event of a possible economic downturn, commitment to financing welfare will require government to clarify exactly how tax will pay for it.

The narrow tax base has been added to by an array of tax incentives which often lack a rationale for their imposition. While a PAYE worker thinks that they pay similar tax to other citizens in the country it is not often the case. The Irish tax system is littered with exceptions which tend to help land-owners and the wealthy as well as tax credits which help the low-paid and unemployed.

Government may be loath to raise taxes right now – and there is a good argument to be had there, but no matter what the tax base remains a major stumbling block to economic recovery. If it is not broad enough to weather a drop in consumer spending and property transactions then it doesn’t have the resources to invest in infrastructure projects which it is found provide a major stimulus.

Business startups are falling at a time when unemployment is growing, this makes sense but it shouldn’t be the case – why not encourage those being made redundant to follow their ideas and put their skills into a startup? With a wider taxbase, government might be able to consider such flexible policy, it is in a straight jacket of its own making.

However the Irish electorate has repeatedly indulged in the fantasy of a narrow tax base, lower taxes and raised public spending. We repeatedly endorsed policy which was in cloud cuckoo land. Now picking up the pieces begins with limited choices – public finances have to be sorted out and this move would make an awful lot of sense in the long and short term.