Wealth Tax: Options for its Implementation In the Republic of Ireland

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The idea of imposing a wealth tax in Ireland is not a new idea. As well as being widely debated throughout the austerity years it has formed part of recent pre-budget submissions from Sinn Fein and the United Left Alliance. Much of the criticism of such proposals are based upon the unassailable fact that it is considerably difficult to gather data on wealth in Ireland even though it is perfectly obvious that wealth distribution is heavily skewed in favour of a small, but powerful minority. The lack of will on the part of government to rectify this information gap is illustrated by the fact that the CSO’s “Household Finance and Consumption Survey”, which will include, a survey of wealth will only become available in 2014, six years after the first austerity budget was introduced.

Basing their proposals on the various bank survey’s and Central Bank of Ireland data has resulted in different assessments of how much such a tax would gain for the exchequer annually. However, in challenging the ULA’s proposal of a 5% tax on wealth the economist Seamus Coffee has estimated that it would be possible to get an annual tax income of €1 billion. This estimate was based on an assessment of the available information and a comparison with the income earned from the French wealth tax. Given the less damaging impact on the economy of such a tax when compared to further reducing the incomes of the majority of households (those earning less than 40K), this is a considerable haul.

Now, Tom McDonnell of TASC in a working paper for the NERI Institute has put together a proposal for a wealth tax that tries to overcome the limits and problems with wealth taxes as they exist in other countries at the moment. It also examines the available data and provides an indicative estimation that the top 5 per cent in the wealth distribution holds 28.7 per cent of net household assets. This leads to an estimation that the net wealth of the 97.5 percentile of Irish households is €749,000.

Below is a briefing paper on the proposal and here is a link to the paper itself.

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Wealth Tax: Options for its Implementation in the Republic of Ireland

Tom McDonnell, TASC

September 2013

NERI Working Paper Series, 2013, No 6

 

Briefing Notes

  1. A well-designed wealth tax has many merits, but if Ireland were to introduce an annual wealth tax it should avoid pursuing the type of wealth tax model that has tended to prevail internationally – i.e. with multiple exemptions and reliefs, with a low threshold, and with a high marginal rate.
  2. A net wealth tax is attractive on a number of grounds:
  • It would raise money for the exchequer;
  • it would be redistributive;
  • it would help combat tax evasion;
  • and if correctly designed it could improve economic efficiency.

3. France, Norway and Switzerland all have net wealth taxes while Spain and Iceland have temporarily introduced wealth taxes.

4. By far the largest component of net wealth in the euro area is owner-occupied housing.

5. The Central Bank estimates that aggregate household net worth in Ireland was €462 billion at the end of 2012. This figure excludes certain types of real asset, such as vehicles, artworks, etc.

6. Higher rates and/or lower thresholds are associated with higher yields. Exemptions and reliefs will reduce the yield.

7. The wealth tax being proposed is as follows:

    • An annual tax, based on self-assessment;
    • The basis of liability should be net wealth, i.e. gross assets less liabilities;
    • It is a tax on household wealth, i.e. Irish and foreign companies would not be liable for the tax;
    • So as not to come into conflict with Irish Income Tax law assessment should be based on residency and location of assets, rather than on citizenship;
    • There should be zero or very few exemptions and reliefs:
      • Exemptions are proposed for pension assets and human capital;
      • An exemption is also proposed for personal property worth up to €20,000 of insured value;
      • Exemptions and reliefs should be strictly limited, as they undermine the rationale for a wealth tax in the first place and distort investment decisions.
  • There should be a relatively high tax-free allowance or threshold:
    • An allowance of at least €1 million is proposed;
    • Less than 2 per cent of households would be affected if the threshold of liability is at least €1 million.
    • There should be a flat marginal rate that is set at a low level:
      • No specific rate is being proposed but a rate of up to 1% is certainly feasible;
      • A ceiling provision (a percentage cap on the combined liability from income and wealth taxes as a proportion of gross income) should be included in the tax structure, which accounts for households with large wealth but very low income.
    • Valuation should be on a self-assessment basis wherever possible and net wealth could be treated as fixed for a number of years.

8. The main risks to be considered are administrative cost and capital flight – the proposed structure is designed to minimise these risks:

    • A viable wealth tax needs to have an acceptable cost-yield ratio with low compliance and administration costs. A low cost-yield ratio is consistent with a minimum of exemptions and reliefs, a single rate, and an easily understood, clear and standardised valuation system that does not insist upon open market valuation and is administered on a self-assessment basis;
    • The wealth tax should also have a low effective rate in order to minimise distortions to economic activity and the risk of capital flight. This suggests a structure with a high threshold and a low marginal rate.

9. There is a general lack of good data on the distribution of wealth in Ireland:

    • Not alone is this deleterious to good economic policy formation and implementation but it also makes precise estimates of potential tax yields impossible;
    • The Central Statistics Office survey of wealth (findings due in 2014) is a welcome development.

10. The potential revenue yield from a net wealth tax is highly dependent on the degree to which wealth is concentrated in the top one to two per cent of the population:

    • A yield of almost 0.1 per cent of GDP (e.g. €150 million) is highly feasible if the threshold of liability for the net wealth tax is set at €1 million and the wealth tax rate is set at 0.6 per cent. Such a yield is attainable even under very conservative assumptions of aggregate wealth and the distribution of wealth in Ireland;
    • Less conservative assumptions of the degree to which wealth is concentrated in the top 1 to 2 per cent of the population generate substantially higher estimates of the yield. The figure of 0.1 per cent of GDP should therefore be considered a lower bound estimate.