Ray McSharry and the Section 23 Timebomb
It’s a godsend for the wealthy, a real haven.”
In March 1988 Ray McSharry reintroduced section twenty-three tax relief on rental properties. It was listed under section twenty-seven of the Finance Act but retained its name from 1981, when it was first introduced as a stimulus for investment in construction.
The Irish Times reported that the government’s decision to bring back the section provided a ‘tax efficient outlet for investors and a valuable shelter for people with existing rental income.’ The maximum relief available was essentially the purchase price of the property less the cost of the site.
The scheme was announced as a short-term measure to help what was seen as a flagging construction industry, and was due to run from the twenty-seventh of January 1988 to the thirty-first of March 1991, but was extended by various finance ministers throughout the 1990s and current decade. It allowed investors to construct and/or purchase flats and town houses, with a floor area of no more than ninety square metres each, in designated areas in towns and cities – including large sections of central Dublin - and to offset construction costs and rental income against income tax.
Its main purpose, however, was not to provide housing or rental accommodation. The reason for the scheme was to provide tax relief for investors. The fact that this was done via construction should not disguise the fact that this was a legal procedure for the avoidance of tax.
The scheme was not exclusive to the income from the rental property in question. The exemptions went to the company or individual who availed of the scheme, and the building costs were offset against all of the client’s existing rental income, subject to the maximum relief allowable.
Investors were able ‘to obtain tax-free rental income from the new units they buy and from any other new or old property they own (or subsequently may buy in the State) whether it is commercial, industrial or residential, until all the relief is used up.’ The tax allowances meant that as a financial investment, property could provide ‘gross return [of] around seventeen per cent, with the additional attraction of a potential capital gain over ten years.’
Property, once again, was providing a tax shelter for investors, and not surprisingly, investors responded with energy and enthusiasm.
For their part, builders almost immediately increased the price of properties ‘with the tax relief in mind in much the same way that first-time buyer housing grants were previously absorbed.’ A property and price boom had begun, fuelled not by wider economic activity within the State – that is, by wages, employment and demand from below - but by investors looking for tax relief and seemingly safe investments.
By the end of 1988 the newspapers were reporting a twenty-four per cent increase in building starts in Dublin, while in Galway the increase stood at over fifty per cent. During the months of September and October around twenty million pounds’ worth of new homes were sold, and according to one Dublin auctioneer, ‘a healthy chunk of that was sold to investors availing of the tax advantages contained in section twenty-three (now section twenty-seven).’
The fact that investment, not jobs and wages, was driving demand could be seen by the nature of the sales.
The Irish Times found that prices at the lower end of the housing market remained ‘all but unchanged with the middle and upper areas deriving the greatest benefit from the boom,’ and that around sixty to seventy per cent of all sales of new homes in the affluent areas of Dublin Four and Dublin Six were to investors under the Section Twenty Three tax relief scheme.
The nature of the late 1980s property boom – its subsidy by government incentives via mortgage grants and the creation of tax havens – was of particular concern to the governor of the Central Bank of Ireland, Mr. Maurice Doyle.
In November 1988 he gave a speech at the annual dinner of the Master Builders Association where he pointed out the dangers of Section Twenty Three concessions, mortgage interest relief, subsidised local authority housing, and first-time buyer grants.
‘The arguments for so much subsidisation – direct and indirect – of the housing market, which looked reasonable at a time of free-spending high inflation, high marriage and birth rates, high interest rates and domestic rate charges’ he said, ´looks rather different against a background of belt-tightening all round, low interest rates, low household formation and no rates.’
In May 1989 the journalist Maev Ann Wren argued that ‘the flow of money into house purchase may be limiting funds for other more productive purposes.’ She pointed out that in 1988 ‘financial institutions lent nearly £300 million more to home owners than two years previously… At the same time the amount of money being invested in new machinery and equipment for productive purposes grew by just over £200 million.’
Wren noted that while government borrowing was down, personal borrowing by way of mortgage debt was increasing. Not only that, the rise in house prices gave home-owners the feeling that they were wealthier as a result.
‘The financial institutions regard [this “wealth effect”] as real,’ she said. ‘They are prepared to offer people new higher mortgages on their homes to finance spending on other things, and in this way the rise in house prices might be passed on in a rise in other prices.
However, none of this “wealth effect” was down to actual productive economic expansion, but to the influx of speculative capital into the housing market via incentives such as Section Twenty Three, mortgage relief, and first-time buyer grants.
The overall rise in property was seen by banks and building societies as a way to increase borrowing, as people were encouraged to “realise” this new-found wealth via mortgage top-ups or moving home. And with little by way of jobs growth or wage increases, the higher mortgages and house prices were justified by the argument that a house purchase was an investment.
Wren was describing the formation of a bubble. She concluded that unless action was taken to deflate the “wealth effect” - by a property tax, for example, which would serve to remind people that property price increases are a cost to the economy, not a boon - Ireland was in danger of substituting its government debt crisis for a personal debt crisis.
Over the next twelve years, Wren’s concerns would come to fruition.
An Irish Times Article on Section 23
Discussion
We welcome and encourage lively discussion from the public about articles on Irish Left Review. You can leave a comment using the form at the bottom of the page. Please read through the existing comments before posting your own.
Leave a Comment
Sins of the Father
Subscribe by Email
Best of the Web
EU Should Admit Greece is Bankrupt | Christian Rickens
The unvarnished truth - the second Greek Bailout should not have happened.
The mistake isn’t the size, but the construction of the bailout package. It isn’t geared to the requirements of the people of Greece but to the needs of the international financial markets, meaning the banks.
How else can one explain the fact that around a quarter of the package won’t even arrive in Athens but will flow directly to the country’s international creditors? The holders of Greek government bonds are to get some €30 billion as an incentive to convert their old paper into new bonds. The aim is to keep alive the illusion that Greece isn’t bankrupt — after all, the creditors are voluntarily forgiving part of the debt. The financial sector is cleverly manipulating the fear that a Greek bankruptcy would trigger a fatal chain reaction.
That leaves €100 billion. But that too isn’t geared to what Greece needs in order to get back on its feet. It’s linked to an estimate of how much debt the Greek economy can bear without collapsing. International technocrats agree that with debts amounting to 120 percent of gross domestic product, the country can just about go on servicing its debt. That’s the level at which the cow can go on supplying milk without dying of exhaustion. So 120 percent became the goal.
Collaboration, with our European partners | Cunning Hired Knaves
The European project was supposed to be a bulwark against the dangers of fascist ambition, but now it is the instrument used to dismantle European democracy in the interest of the risk adverse looking for a steady income stream from the provision of the social net by those who cite the words and actions of old fascists while doing so.
The post Collaboration, with our European partners by Richard of Cunning Hired Knaves summed up in one sentence. For much better sentences and many more urgent points read the post.
On Sunday there were massive demonstrations throughout the Spanish state, with half a million people on the streets of Madrid and 450,000 in Barcelona, protesting against the labour ‘reform’ planned by the Partido Popular, the right-wing party that most closely represents the interests of the power elites that conserved their position when the transition from dictatorship to democracy was undertaken.
S.P.A.R.K. protest at cuts to lone parents, Dublin 18th February 2012
Many families were cut in the last budget but lone parent families were particularly hit by the Fine Gael/Labour Party government.
The key elements are that single parents can’t take advantage of training such as Community Employment (CE) Schemes and when the youngest child turns 7 years old, the parent is declassed as a lone parent but treated as an ordinary worker even though there are few affordable creche places. There is a bill coming up in March which will copper fasten some of the worst elements of government plans.
There is particular anger directed at the Labour Party because they are associated with women’s rights and a more progressive society.
Please share the link to this video
Exiting the euro | Michael Roberts
Michael Roberts argues that those in Greece who cite the example of Argentina when suggesting that Greece should leave the Euro are not necessarily looking at the whole picture. The situations are not the same, Roberts points out, citing Argentina’s former central bank governor at the time, Mario Blejer and his recent piece in the Financial Times. He also points to research based on the the experience of five recent devaluations of economies in crisis (including that of Argentina) which “shows that they lead to a 10-20% fall in real GDP and take five to ten years to recover to previous real GDP levels. But that is not to say that there is no alternative to “lowering wages, privatising the state sector, reducing taxes for the corporate sector (especially big business) and ‘deregulating’ labour markets i.e. the super-exploitation of the Greek people to raise profitability.”
But the left could also find an alternative policy to exiting the euro where Greece negotiates a full default on its debt to private and foreign bondholders; takes over the banks; and uses the savings from bond and interest repayments (€17-20bn a year) to start state directed investment in jobs, technology and funding small businesses, while staying in the euro to protect the savings of the people from destruction, keeping down inflation and avoiding a rise in foreign debt. The question of exiting the euro then becomes an issue for the Euro leaders to impose (and to be resisted by a campaign within Europe), not as the main policy plank of the left.
Corporate tax avoidance: where are the worst offenders?
This table comes via the Tax Justice Network (and Richard Murphy). It’s from a table produced by U.S. researcher Kimberly Clausing and as TJN notes “demonstrates which countries are working hardest to wage economic warfare on the United States (and, by extension, on other countries,) via the global tax system”.
Solidarity campaign to support the people of Greece
Mikis Theodorakis, famous Greek composer of Zorba’s Dance, and Manolis Glezos, veteran resistance fighter against the Nazi occupation, have issued a call for a European Front to defend the people of Greece and all those facing austerity. We have decided to support this call and work with trade unions, campaigns and parties across Europe to establish a European Solidarity Campaign to defend the people of Greece. We will organise solidarity and raise practical support for the people of Greece; they cannot be made to pay for a crisis for which they are not responsible.
Chris Dillow | Capitalism against freedom
[...]
During the Cold War, opponents of communism routinely, and not entirely wrongly, claimed to be champions of liberty. Freedom for capitalists and freedom of speech and thought go together, it was claimed. “Freedom is indivisible” wrote Bruce Winton Knight in 1952. “Economic freedom is…an indispensable means toward the achievement of political freedom“ wrote Milton Friedman in Capitalism and Freedom. And back in 1944 Friedrich Hayek complained that “We have progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past.”
Today, though, this seems wrong. Many threats to freedom come from capitalists. The story is no longer capitalism and freedom, but capitalism against freedom.
Ian Stewart | The mathematical equation that caused the banks to crash
In The Observer, Sunday 12 February 2012
Anyone who has followed the crisis will understand that the real economy of businesses and commodities is being upstaged by complicated financial instruments known as derivatives. These are not money or goods. They are investments in investments, bets about bets. Derivatives created a booming global economy, but they also led to turbulent markets, the credit crunch, the near collapse of the banking system and the economic slump. And it was the Black-Scholes equation that opened up the world of derivatives.
The equation itself wasn’t the real problem. It was useful, it was precise, and its limitations were clearly stated. It provided an industry-standard method to assess the likely value of a financial derivative. So derivatives could be traded before they matured. The formula was fine if you used it sensibly and abandoned it when market conditions weren’t appropriate. The trouble was its potential for abuse. It allowed derivatives to become commodities that could be traded in their own right. The financial sector called it the Midas Formula and saw it as a recipe for making everything turn to gold. But the markets forgot how the story of King Midas ended.
Greece: a Sisyphean task | Michael Roberts
In a Eurozone that is unwilling to share its surplus with weaker, hardest hit economies there is no other option for those economies but default. Despite the agreement of Greek politicians to shorten their political life and accept the deal all that they have done is simply postpone this eventuality once again. However, even that postponement might be shortened by the Greek elections in April where the smaller leftist parties outside the coalition currently have 40% of the vote. Or so says Michael Roberts:
Whatever the Greek coalition leaders agree to and try to implement, such is the weakness of Greek capitalism, it will not be able to meet its fiscal targets or get its debt down to reasonable levels. Before the end of the year, the Troika will have to report that Greece is not delivering. Then the EU leaders will have to decide whether they ‘let Greece go’ or not. The EU leaders have agreed to more money for Greece (or more accurately its bondholders and banks) in return for draconian cuts in living standards in order to provide more time to try and ‘ring-fence’ other vulnerable Eurozone states like Portugal and Ireland (where they are preparing extra funding). So when Greece goes down, it will not affect the rest (or so the EU leaders hope). Of course, the Greek people may force the issue earlier if they vote in an anti-Troika government in April.
As Greece stares into the abyss, Europe must choose | Maria Margaronis
Do we really want to live in an economic union that must destroy the future of millions in order to just tick along? Maria Margaronis points out that the situation in Greece today says little about Greece and everything about the EU.
The trouble with historical metaphors is that they can obscure the present: what’s really at stake here is not Greece’s identity but Europe’s. All eyes are fixed on Athens, but the way out of the crisis requires a choice about what kind of Europe we want. The one we have now, with its deep structural inequalities and its rigid adherence to a failed economic ideology, protects neither democracy nor human rights. Stiff-necked and punitive, it prefers to eat its children.
Comment by: Mark Coughlan
Oct 19th 2010 at 00:10
Really good and clear explanatory piece Conor. Enjoyed it.
Comment by: Conor McCabe
Oct 19th 2010 at 00:10
Thanks Mark. If you have access to the Irish Times archive, it’s well worth having a search for Maev Ann Wren’s articles on housing, going back to the 1980s. Really, she’s great and she understands the economic reasons why fuelling property speculation in Ireland in the 1980s and 1990s is going to lead to disaster.
I have one article from her from I think 1994 where she just debunks the whole “Irish obsession with property” myth, pointing out that as recently as 1961 seventy-five per cent of all urban dwellers rented. And she knows that money put into housing and property speculation is money taken away from productive growth - the type of growth, indigenous industrial export-led growth, that Ireland so desperately needed to break out of the structural weaknesses of its economy.
She moved into health studies, of course, but her work on housing is really worth checking out.
Comment by: Tom O\'Connor
Oct 19th 2010 at 16:10
Excellent assessment from the archives Conor. Good to talk to you at greaves.
All the best,
Tom.
Comment by: Conor McCabe
Oct 19th 2010 at 16:10
Thanks Tom. It’s from a chapter on housing from a book I’m working on, hopefully it’ll be out next March. No exaggeration to say that any time I come up from digging around in the economic history of Ireland I feel the need to shower with iodine. The scams, the blatant theft and corruption, it gets under your nails and you just feel caked with dirt, it is so repulsive.