As most Irish people are well aware, the Government through Minister Phil Hogan recently announced that, on 1 January 2012, it will be introducing at least two new charges on households: an annual property tax and an annual water charge. Flying in the face of all principles of taxation and economics, both are due to be flat charges, “at least for the moment”.
Axe the poll tax
“Flat charges”, or poll taxes, are one of those rare areas where economists, environmentalists and what one might term normal people all agree: they’re silly. On the one hand, they will do nothing to promote better use of either water or land – in fact, they may encourage people to waste water, precisely because they feel that they’ve paid for it. On the other hand, they are incredibly unfair, as someone who lives in a one-bedroom apartment has to pay the same as someone who owns a five-bedroom detached property with substantial land and a swimming pool.
The justification for the water charge is at least somewhat believable: they can do no better until they install house-by-house water meters and that costs money… hence the charge. You could view it as the charge you have to pay for a couple of years to enable the government to get off your case and on to the case of people wasting water.
However, the line trotted out for the property charge is distinctly unbelievable. As thejournal.ie reported: “because a property tax would be dependent on seeking a valuation of every property in the country, a flat rate will need to be introduced in the meantime”. This is apparently the limit of thinking in government circles: if we can’t do it 100% right, we should do it 100% wrong in the meantime.
I don’t want to be overly sensational, but is the Government not aware of what happened in the UK when the Government there tried to introduce a poll tax, let alone what’s happening in Greece and elsewhere at the moment? A quick search on YouTube throws up some pretty scary scenes: here’s one from central London in 1990.
Some free economic consultancy
As readers of this blog are aware, though, I’m not a fan of giving out for the sake of it – I try and make some sort of constructive suggestion. I’m hoping today’s suggestion will be particularly useful. It’s a simple one. Put every Census district of the country into ten different bands of the approximate cost of land and scale the property tax according to that. There is a wealth of information out there on Ireland’s property market, which the Government can use to find out the approximate “pecking order” of property values around the country. This would then be a very handy interim step towards the introduction of a full and fair land value tax, as discussed last week.
I can go one better than make the suggestion, I can actually do it! The map below puts each of the 3,400 Census districts in Ireland into one of ten land-value bands, from the top 10% around south Dublin and north Wicklow to the country’s cheapest homes in the Upper Shannon region. It’s based on research I’ve been doing in Oxford (a preliminary version of which I presented at the annual Spatial Economic Research Centre conference in London last month). The mapping is entirely thanks to Justin Gleeson of the National Institute for Regional & Spatial Analysis at NUI Maynooth, although the blame for its application for this purpose rests entirely with me. An underlying spreadsheet of the price per Census district is available for the Government, if it is interested.
For those who are curious, the map is calculated using the 200,000 advertisements of properties for sale on daft.ie from the start of 2009 to the end of 2010. The underlying analysis gives a like-for-like price per Census district, controlling for a range of property attributes, such as type, bedroom number and bathroom number, and – quite importantly – for the date the property was advertised. In that way, what you’re seeing is stripped of the time aspect, it’s even stripped of the level (so the fact that it is just asking prices doesn’t really matter) – it is just a ranking.
How much will it cost me?
Not enough free economic consultancy? OK, I’ll go one further and even suggest some bands! Roughly speaking, there are about 1.5 million private households in the country. Suppose that the Government wants the interim charge to bring in €1,500m when it’s fully running, as a precursor to a proper land value tax that contributes about €2,000m per annum to the Exchequer (this is on a par with what other countries get from property tax). That suggests an average charge per household of €1,000. Clearly then, a suitable charge for the top band of properties would be in the region of €1,400 a year, while one for the lowest band would be about €500. I would also suggest, while I have the stage, that to make it easier, PAYE workers should be able to deduct it from source, so it comes out as extra €40-€120 a month in tax.
Clearly, people who live in small properties in expensive locations will be less enamoured with this proposal than those who live in large properties in cheap locations. Certainly, a full property tax would not only take location into account but also size of the plot of land. It’s important to remember, though, that ultimately the most efficient property tax is one on land, not on the buildings and improvements on top of the land. Put another way, those who live where land is more valuable benefit from better amenities, like access to labour and consumer markets, and better public services. This tax should be used to help sustain those amenities and improve them elsewhere… and when other areas benefit, they pay up too.
I’m not arguing that this is a perfect rendering of the contours of land value in Ireland. Indeed, you could do one sanity check very easily, by cross-referencing the house prices map with one based on rental data for robustness (don’t worry, lads, I have that done for you as well!). And if I had access to Property Registration Authority data on transaction prices and the Registry Office information on what properties are where, we could really make sure we got this right.
But that is actually work that takes time and mightn’t get done by January 1st next. What we can do, though, and what I’ve suggested above, is hopefully simple: instead of getting it 100% wrong before getting it 100% right, why don’t we get it about 50% right first? Surely that makes sense.