Property Tax

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Championing the Affluent

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The affluent are blessed in their champions.  They have a myriad of commentators fighting their corner.  In the Sunday Independent Colm McCarthy, discussing the benefits or otherwise of a third tax rate on high incomes, stated:

‘In order to raise meaningful amounts, it (the threshold to enter the third rate of tax) cannot be pitched at a level much higher than the €100,000 indicated, but that pulls into the high-tax bracket many people who do not consider themselves exceptionally well-off.’

€100,000 not exceptionally well-off?  Ok, maybe, but they certainly are ‘well-off’; very well-off.  In fact, they are in the top 3 percent of income earners in the state.  If these high-earners don’t consider themselves exceptionally well-off, what would they think if they were part of the 50 percent of income taxpayers who earn below €29,000 a year?  Or the 25 percent of the population who live in official deprivation.

These kinds of comments are part of the don’t-tax-high-earners-too-much-because-then-they-will-leave-in-a-tax-huff argument.  Thomas Molly, writing in the same newspaper, puts it this way when discussing the wealth tax:

‘Any other sort of wealth tax is likely to bring in very little money as the cash moves overseas at warp speed but is guaranteed to scare away many of the people who create wealth and jobs in our society.’

Ah, tax flight – the phenomenon whereby high taxation causes people to leave the jurisdiction.  How valid is this?  Not very.  The US is a good place to study.  Individual states can set their own income and wealth taxes in addition to Federal taxes.  And moving from one state to the next is not nearly as challenging as moving from one EU country to the next.  So what happens when states like Maryland or New Jersey or Oregon raised taxes on the highest income groups?  This study – ‘Tax Flight is a Myth’– found:

‘Attacks on sorely-needed increases in state tax revenues often include the unproven claim that tax hikes will drive large numbers of households — particularly the most affluent — to other states. The same claim also is used to justify new tax cuts. Compelling evidence shows that this claim is false. The effects of tax increases on migration are, at most, small — so small that states that raise income taxes on the most affluent households can be assured of a substantial net gain in revenue.’

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Facilitating Corporate Tax Avoidance is at Heart of What is Wrong

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Here we have two investigative pieces in the Irish Times and the Guardian which show that jobs created by MNCs in Ireland are not necessarily the high quality, well paid types of jobs those defending Ireland’s tax avoidance system claim. The first illustrates that most of these are call centre jobs created to provide tech support for sales that may be registered in Ireland but are in fact generated in countries within and beyond Europe, Africa and the Middle East. As they require language skills far greater than even very well educated Irish workers normally have (Ireland has one of the lowest proficiencies in a second language in the OECD ironically enough) these are not jobs created for those who have been through the Irish education system. This is despite the fact that we are told that it’s not tax that attracts these companies but our well educated workforce. Again, this is attractive and is a credit to Ireland’s high level of completion at second level which is well above the EU average, but it’s being undermined and many of the skills that these companies require are in law and accountancy which narrows considerably the ability of people to think beyond the servicing of MNCs law and accountancy needs. It is hardly a coincidence that Cathy Kearney, which the Guardian describes as Apple’s ‘top lieutenant in Ireland’ is an accountant.

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On the Need to Wield the Political Crowbar

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I heard a Fianna Fail TD saying on the radio that the decision to tie the household charge and the property tax to the funding of local councils was an attack on local democracy. As central funding through general taxation has been removed a failure to collect adequate amounts of the property tax means that funding of local services will be smaller.

Allowing local authorities to increase that charge puts the negative political feedback, particularly in areas where compliance is less, like Donegal, on to the local councils and protects the central government. It was an odd sensation, shouting at the radio (not unusual) in agreement with someone in Fianna Fail (which very much is).

However, I would add that with a smaller budget because of the problems of collecting the Household Charge and the property tax – and the structure of the property tax is almost exactly the same as the household charge and its associated problems, with good reason – means that it would require additional cuts to services.

This will follow the now established pattern of replacing publicly funded publicly owned services with private operations. Again, as has been well established, the private operation will be less efficient, more costly to the public purse in the medium term and the tendering process will be corrupt or suspect, with small operators losing out to larger conglomerates leading to a monopoly situation for the provision of these services after an initial flurry of 'competition'. It’s also been well established that Public Private Projects have been seen for over a decade as a growth opportunity for financial institutions in the IFSC, and the present government has recently provided them with a very specific kitty just for this.

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hittingveryhard

Why Some People Will Get Hit Very Hard

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Whatever about the leaks, the underlying thinking in much commentary and policy analysis shows why some people will get hit very hard.  Yes, those on social protection should look out –especially around secondary benefits and eligibility.  And pensioners – many of their programmes will be sliced if not totally jettisoned.  If you’re unemployed, don’t expect much help from the budget (it will end up destroying jobs – especially through investment cuts).

What struck me most is the proposition that Child Benefit should be taxed.  This featured on RTE’s This Week (the weblink to the programme is unfortunately not available).  The Minister for Social Protection claimed her preferred position was to tax Child Benefit since this would protect the most vulnerable.  The ESRI’s Professor John Fitzgerald made a similar statement – that those on high incomes would be taxed while the vulnerable would be spared.   This view shows a lack of appreciation of what can happen to hundreds of thousands of households struggling on modest incomes.

Of course, Child Benefit will not be taxed in this budget; apparently, the computers in Revenue and the Department of Social Protection still can’t ‘talk’ to each other.  And here’s another thing:  taxing universal benefits does not undermine the principle of universality.  Taxation can introduce a progressive feature in payments that are granted to all, regardless of income or employment.

But the emphasis on ‘protecting the vulnerable’ ignores the fact that people at work are also vulnerable.  Yet it is this crucial group that would be hit in the ‘preferred option’.   It underlines a view that social protection is for the poor, rather than for protecting the social.

What would happen if Child Benefit were taxed?  How would some income groups be hit?  Those on social protection would be protected – but low and average paid should watch out.

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Smart Fiscal Consolidation: Why A House-Property Tax Shouldn’t Be Introduced Next Year

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Let’s assume the Government comes up with the best house-property tax ever devised – truly progressive, taking into account all the social factors such as unemployment, low-income, arrears, and mortgage equity (or lack of).  Yes, it’s a big assumption but let’s try it anyway.  If this occurred there is still a strong argument that the Government should not introduce such a tax next year or even the following.  And that is because the economy and hundreds of thousands of households cannot absorb it.  Let’s run through some of the arguments.

First, the domestic-demand recession is expected to continue next year – the sixth year in a row.

As seen, both the EU and the IMF expect domestic demand (consumer spending, government spending on public services, and investment) to fall again next year.  They both estimate that consumer spending will fall, as more people wilt under the combination of austerity measures, falling incomes and unemployment.  Even by 2014, domestic demand will start rising but only marginally.

While under normal growth conditions, a house property tax would be an efficient tax – limited impact on the domestic economy and more efficient at reducing the deficit; relative to spending cuts.  Even so, the impact on consumer spending would be high:  for every €100 raised in a house-property tax, there is a resulting reduction of approximately €75 in consumer spending.  In normal growth situations, the economy would absorb this.  But as we know, these are not normal times.  So what would be the impact of introducing such a tax while the economy is still in a domestic-demand recession?

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