Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

August 2012

Property tax – it’s not rocket science!

Ireland’s struggle to introduce a property tax continues, as does the public’s fixation with it. A minor bullet point in this update to the IMF-EU “troika”, confirming what was already decided – that Ireland is going to bring in a value-based property tax – is (along with that other staple of Irish debate, abortion) leading the news this morning.

The on-going poor quality of information doing the rounds is a big frustration so I’ve decided to continue my crusade for good policymaking in Ireland and post (yet again for long-standing readers) about property tax.

Why a property tax at all?

The yawning gap between what the Irish government takes in and what it spends means that both spending cuts and new tax revenues are needed in coming years. Comparing Ireland’s tax structure with other countries, the country already has among the highest marginal rates of direct (income) and indirect (VAT) tax in the world. What’s missing? Well, the third type of tax, after direct and indirect, is wealth tax.

And real estate comprises the bulk of wealth – not just in Ireland, but everywhere. Ireland’s homes are collectively worth roughly €300bn – a huge chunk of our balance sheet. What’s missing, when you compare Ireland with other developed economies, is a property tax. Those who argue against property tax are not taking a principled stand against bank bailouts. They are arguing for even higher income or consumption taxes. And thus missing the chance to tax wealthy non-residents who own property in this country.

What is a value-based property tax?

Ultimately, I’m not sure why the Government is making a mountain out of a molehill. There are basically four types of property tax out there – flat charges, bands, full value and site value – and they are fairly easy to rank. The worst kind of property tax is the flat charge, what was introduced here earlier this year. It is obviously regressive and unfair and is also just a temporary measure so little more needs to be said about it.

The next worst type of property tax is the bands system. Under such a system, if your property falls under certain thresholds, it benefits from a lower tax rate than others. This is similar to how stamp duty used to work in Ireland. It is also how council tax works in the UK. Until this morning, I hadn’t heard anyone argue in favour of it, although there had been some mumblings in newspaper reports – this morning, though, Fergal O’Rourke of PWC actually called for a bands system.

What has happened in the UK should be a salutary lesson for Irish policymakers. Bands means trouble because in any given year people want to be under the threshold, thus distorting prices, while over time unless bands change every year, they become ridiculously outdated. So in England, your property tax is based on what the value was in 1991, not today, because no-one can agree on updating them. Even aside from our preferences having changed over the last generation, this is plainly bad policymaking. Why anyone, least of all a tax expert, could think is a runner at all is a mystery!

Should we pay relative to the market value?

An improvement on bands is a full value tax – you pay a percentage of what your property is worth every year. Those with more property wealth pay more in property tax. Straight away, some of the dodgy side-effects of a bands system are overcome. If property prices rise or fall, you don’t have to worry about political will to update bands. However, a moment’s thought should point out some pretty weird features of a full-value property tax.

For example, the Minister for the Environment is a big fan of regenerating town centres, which have fallen victim to edge-of-town retail centres in recent years. However, under a full-value tax, the owner of a derelict city-centre site has no incentive to redevelop it because if he does, he’s faced with a higher property tax bill. What sounds like an issue for developers also affects households. If you make your home more energy efficient, up goes your annual property tax bill. New extension? Up goes the bill. Anything at all that involves you using scarce land in socially more useful ways is punished.

This is the major theoretical problem with full value tax: the last thing you want is for your tax system to punish those who use a scarce resource well. And then in practice, there are huge issues of implementation. Is that extra room upstairs a bedroom or a study? (Each will have a different price.) Is that attic properly converted? Is that outhouse part of the main building? All of these are prices that have to be measured and updated, creating lots of work for people like me but ultimately very little use to the taxpayer.

What is “site value” and why should we tax it?

The fairest form of property tax is the site value tax. This is not as complicated as some try to make it out. The value of your property has two components: the land and what you put on the land. Subtract the latter from the total value and you have site value. How might we measure the value of land around the country? Happily, it’s already been done and is available free of charge from smarttaxes.org. There’s even a map outlining the contours of site values in the country. Pages 14-16 of that report also go through options in relation to those on low incomes and those in negative equity, as well as a number of other issues.

There are many arguments in favour of site value tax and few against. It rewards, rather than punishes, households that make their home more energy efficient. At a deep level, site value tax is inherently fair – after all, why is land worth more in some places than in others? It is because society and nature – not individuals – have created amenities that people value and pay for. Is it too much to ask people to pay back a small part of the benefit they are getting from society? Site value tax is also really handy because it can be applied to all types of land, residential, commercial, public and agricultural land, with huge beneficial side-effects in terms of land use and – dare we say it – economic recovery.

Site value tax is also a tax on hoarding land and speculating, as residential land banks on the edges of towns would incur the same as developed estates. This also removes the incentive for people to get their land banks zoned residential on the off chance they could become millionaires. If it’s zoned residential, use it as residential or pay the price!

According to media reports, the Government is currently of the opinion that a site value tax “would throw up anomalies” such as a rundown property and a modern property on similar sites having the same property tax bill. That is not an anomaly. That is the tax system encouraging us all to use as well as possible a scarce and valuable resource, i.e. land.

I agree that a property tax should be easy to understand. A range of bands and tax rates creates a complicated system that people want to game. That is only one consideration, however. After all, it is very easy to understand a €100 household charge but that was hardly publicly accepted. A simple flat site value tax rate is well within the grasp of a population that frequently votes in referenda on constitutional and foreign policy issues.

What do other countries do?

One of the oddest arguments I have heard yet against the site value tax is “no-one else is doing it”. Even if it were true, what an odd argument! In-built bias towards the status quo means that most countries are stuck with property taxes very similar to what they had fifty or a hundred years ago. Ireland – by dint of auction politics since the 1970s – is in the oddly lucky place of being able to choose the best system without the constraints of status quo.

But even then, it is not true to say that no-one uses site value tax. There are numerous states and cities around the world, from South-East Asia to North America, that have it. Two other small open economies in the EU – Denmark and Estonia – use site value tax consistently and successfully. Rather than ape the failed system of our nearest neighbour, perhaps we could take a leaf out of their book instead.

The lack of a property tax means we have the opportunity. With Land Registry records on who owns what site where, as well as existing research on the contours of land value around the country, we have the means. And with the positive side effects that only a site value tax can bring, we have plenty of motive. Hopefully our Government won’t let us down.

The post above is based on an op-ed piece I wrote in the Sunday Business Post earlier in the month.

Ireland’s two-speed rental market

The latest Daft Report was released yesterday – all the materials are available from the usual place, including a commentary by John Logue, the new president of the Union of Students in Ireland, and the full report itself (PDF), which includes the annual “Student Special” of rates close to all Ireland’s major higher education institutions. There are two main headlines, at least by my reading: one in relation to rental trends and the other in relation to the number of properties on the market.

In relation to average rents, it remains hard to describe the national rental market with just one statistic. Rents have been higher (in year-on-year terms) in Dublin and Cork every quarter since the start of 2011 (the last six quarters). On the other hand, outside Ireland’s cities, rents have been falling consistently in year-on-year terms since early 2008.

It should be noted that the rate of change in both cases is small – up typically less than 2% in Dublin and Cork, down roughly 3% outside the cities. Nonetheless, as each quarter adds to the last, the split becomes more and more apparent and something a few of us predicted would happen in late 2009/early 2010 looks to have come to pass. (For those wondering about Ireland’s other three cities, Galway city is a bit of intermediate case – rents have effectively been static the last six quarters. Limerick and Waterford are closer to the non-city areas than to Dublin and Cork in their performance.)

Rental supply

In relation to the supply of rental properties, the number of rental properties on the market continues to fall – and this is again driven by Dublin. On August 1st 2012, there were 16,500 properties on the market available to rent, down from almost 19,000 on the same day in 2011 and over 23,000 in 2009. While this is still well above the 7,000 or so rental properties on the daft.ie site in mid-2007, I think comparisons with 2007 miss two important facts: the rental market outside cities was much more limited while there were free capital gains to be had in real estate; and secondly, the delay in people buying property means that there are more renters than a “business as usual” scenario.

In Dublin, there were 4,200 rental properties on the market at the start of August this compared to 5,400 last year and 6,500 two years ago. As someone who was actively on the market last summer, the market was by no means over-stocked then – so market conditions will be tight for those looking to rent in prime locations, even as conditions remain firmly pro-tenant in many counties. There is less than one month’s supply on the market at any one time in Dublin now, compared to two months in Connacht-Ulster.

A case of urban economics

Returning to the first point, though, the difference between Dublin and Cork in particular on the one hand and the non-urban areas of the country on the other is increasingly striking. The graph below shows the performance of the two segments over the last two years (since 2010-Q3) as well as giving the context of what happened 2006-2010.

Rents in Dublin and Cork compared to the non-city areas, 2006-2012 (2010Q3=100)

The fall from the peak to 2010-Q3 was certainly larger in Dublin and Cork… but the falls elsewhere since then reverse this conclusion. Rents in Cork and Dublin are now on average 25.5% below their 2007/08 peak, while the falls in the “Rest-of-Country” segment (i.e. outside the five main cities) is now 27%.

This is probably mostly a case of common sense: people move to cities because they are the best job creators. The “labour market amenity”, as urban economists such as myself might call it, has perhaps strongest appeal when jobs are tight. Given no significant oversupply of rental properties in either of Ireland’s main cities, and given willingness-to-move to the cities from elsewhere in the country by Ireland’s young workers, it’s unlikely there’ll be any reversal of the trend any time soon.

The price of freedom, the power of narratives – thoughts on the Parnell Summer School

Earlier in the week, I posted an overview of my talk at this year’s Parnell Summer School, where the theme is Sovereignty & Society, in recognition of the 100th anniversary of the Home Rule Bill. I mentioned towards the end that following my address, there was a panel discussion on Ireland’s economic sovereignty, involving Richard Boyd Barrett (the People Before Profit TD), Paul Murphy (the Socialist Party MEP), Brendan Butler (of IBEC) and Pascal Donoghue (of Fine Gael).

The discussion was in reality four rather separate speeches, each of about 25 minutes in length, followed by audience Q&A. Given their backgrounds, however, the speeches by Boyd Barrett and by Murphy were quite similar in nature. When listening to both, it struck me that – whatever about TV debates, particularly when it comes to elections – there is no sense in trying to engage on particular points. If you disagree, it has to be a disagreement at a fundamental level, the level of the entire narrative. This is not a criticism of either contributor – they are both excellent speakers. In fact, it is a testament to the completeness of their narrative that really means the only fruitful engagement will come from going all the way back to basics.

The Socialist Narrative

I will do my best to sum up the Boyd Barrett-Murphy argument: they believe that the economic crisis that started in 2007 is being used as an opportunity by a global elite in control, who share a common ideology, to embed that ideology permanently and beyond the reach of citizens, i.e. anti-democratically. To them, the global elite’s “neoliberal” ideology is summed up by capitalism, privatisation, deregulation and the market. (By the by, I’ve never understood what was precisely so ominous about being a latter day liberal, other than the tone in which it is used by those who have set themselves against neo-liberals!)

According to the narrative, this elite that is in commanding control is pro-market, pro-1% (i.e. themselves presumably) and anti-worker, hence they are trying to reduce minimum work standards and similar, and impose austerity so that the “ordinary man” pays the cost of them enjoying greater wealth. In that context, the EU’s new fiscal “six-pack” is interpreted easily – as a way for the elite to put their ideology irreversibly beyond democratic control.

Paul Murphy, who spoke second of the two, explain in more detail that the root problem is profit. When the profit motive is king, it tramples on people, according to him – why else would EU companies be sitting on €3,000 billion of cash reserves while there are tens of millions unemployed across the EU?

A complete story is not necessarily a true one…

Listening to both men speak, they are compelling public speakers and likely to tap into public anger. They are likely in the next election to have success with those who believe that it is banks, not deficits, that are the bulk of what’s wrong with Ireland’s problems right now. If you try and tackle one point that they make, their answer will most likely be something that is entirely consistent within their narrative – and leaves the questioner having to go one step further back.

Ultimately, the 21st century’s socialists view of the world, if Boyd-Barrett and Murphy are representative, comes down to control. Socialist or not, we all have to answer the question: why are there so many things wrong in the world right now? From first-world problems like falling birth rates, pension shortfalls and youth unemployment to more pernicious issues ravaging developing countries, the world is not as any of us would like – and any account of the world has to incorporate the economic crisis of the last five years. And it comes down to whether you believe in incompetence or malevolence.

Evil? Or just incompetent?

The root difference between my world-view and and the socialist one is that they believe the world is like it is by design – malevolent forces (the “global neoliberal elite”, the 1%) have crafted a world exactly as they would like it. To me – and I think to very many others – the world is like it is due to the incompetence of those in charge, not because this is their masterplan. Socialists seem furious that the economics of Keynes gave way to the economics of Friedman, oblivious to the fact that the dominant model in economics, the one that has dictated the rules for monetary and fiscal policy for the few decades, is New Keynesian! Keynes believed that output could be controlled by policymakers to dampen business cycles – and mainstream economics has clung dearly to that belief, refining it so that it is the interest rate that is used to do this.

If we step back for a minute, if there is a global elite working against our interests in confident control of the world economy, why is it the case that the typical person is so much better off now than fifty years ago (looking at figures such as inflation-adjusted mean and median incomes)? Why is labour’s share of income so high if capital is in control? Why is the standard of living in the 2010s going to be better than any decade that has gone previously? More fundamentally, why are they allowing democracy to spread? Why are they allowing people’s education levels to get higher and higher? After all, surely, at some point if we keep getting more educated, we’ll eventually cotton on to their plan? And why do they allow mobility between “us” and “them”?

This is not to say for a minute that there are no issues to sort out. But even in those issues, the narrative starts to crumble. Why are so many genuine capitalists (i.e. those who earn money through capital, rather than labour) and “right-wingers” so vehemently against bank bailouts? Well, presumably because a system where some people cannot lose no matter what (bank bondholders, say) is a  subversion of an economy built on risk-taking. Risk means the potential to lose.

Politics and academia also don’t sit easily with the narrative. In the US, for example, the typical lower income household has seen their real income at best static over the last generation and even longer. But in terms of economic policy, this is one of the hottest issues on the campaign trail – if the US elite were truly in control of everything, this is the last thing they would want! In terms of economic theory, static incomes of lower-income households is one of the most active areas of research (at least in the US) – the two candidates for causing this are trade and technology, not – I guess it should be pointed out – a global elite in control of our lives.

Follow the trillions…

For me, the point about three trillion in the bank neatly encapsulates the shortcomings of the 21st-century socialist world-view. When making that point, there is the implicit assumption that if lots of money is left in the bank, it does nothing – a shockingly poor level of understanding of fractional reserve banking! One man’s savings is another’s borrowings. Moreover, there is the explicit accusation that these multinationals are leaving money in the bank instead of hiring unemployed people. As if business people would rather sit on what are assumed to be useless piles of cash than make more money by investing it.

The currency of the world is confidence. It dictates the value of money, the value of wealth, even the business cycle. It is not something that can be managed – either by benign policymakers or malevolent elites. If some businesses are “sitting on hoards of cash”, it is because they are nervous about the future. But at least they are depositing that cash with banks, who can then lend it out to other businesses. If those banks are “sitting on hoards of cash”, it is because they are nervous about the future.

Ultimately, no-one is in control. I’m not sure if that makes the world a scarier place than one in which at least someone, albeit a malevolent elite, is in control. But it’s a reality we need to accept if we are react as best we can to what’s going on around us.

Undoubtedly, any socialist worth their salt will have answers to some or all of these points that restore the cohesive whole of their narrative. I would like to point out that I posted the above at least for myself as for anyone else, as I wanted to crystallize – so soon after hearing the guts of an hour of modern socialist thinking – that world-view and my thoughts on it. As always, I mean to engage (and certainly not caricature or mock). I am currently reading Michael Sandel’s “What Money Can’t Buy – The Moral Limits of Markets” as a way to delve more fully into this topic. When I’m finished the book, I will post a review on the blog. It’s early days in the book and I would already love to write my own book in reply!

Sovereignty is over-rated, society is under-rated – address to this year’s Parnell Summer School

After a bit of a break from blogging for a variety of reasons (not least getting married!), an invitation to speak at this year’s Parnell Summer School provided the perfect opportunity to find my voice again. Based in Parnell’s family home, in Avondale House, County Wicklow – one of the most picturesque spots in arguably Ireland’s most picturesque county – the annual Summer School builds on the memory and works of Parnell. This year being the centenary of the Home Rule Bill, the theme was ‘Sovereignty and Society’ particularly in light of all that has happened in Ireland in the last five years.

I took the opportunity, during my lecture, to outline what an economist thinks of the concepts of (economic) sovereignty and society. In particular, I argued that I felt that the concept of economic sovereignty was one that was significantly over-valued, while society was a hugely under-valued concept.

Sovereignty is over-rated

In short, my argument in relation to sovereignty is just specialisation and the division of labour recast. People happily cede sovereignty all the time to give themselves a better future. No-one tries to build their own home or produce all their own food. They pool their sovereignty in a community where these tasks are shared and so are better done. Perhaps a clearer analogy is when an individual borrows to further their education or a household borrows to buy a new home. These are decisions that immediately subject that person or family to scrutiny, in relation to spending and lifestyle patterns and plans for the future. A lender has taken some of the borrower’s “sovereignty” – and yet, the borrower is happy to pay that price, because they want a better future. And if you put yourself in the shoes of the saver, giving your hard-earned savings over to someone else, it’s not hard to see why saver-lenders want this scrutiny.

This works at the level of the country, too. No country has ever provided a high standard of living for its citizens by abstaining from investing in its future, and investment involves large-scale borrowing. So, as soon as we want what’s best for our community, straight away we should be prepared to yield some of our “independence” to deliver it.

Quite why there is such a fuss about lost sovereignty because Ireland is currently borrowing from ‘our mates’ (the other countries that make up the EU and IMF) at preferential rates, rather than borrowing from the international capital markets is beyond me. No matter who we borrow from, mates or markets, we will need to have a fiscally responsible set-up for them to do so. And the Irish Government spending €20bn more than it takes in in revenues is not fiscally responsible by anyone’s measure.

Society is under-rated

In relation to society, it’s my firm belief that the policy-making in Ireland – and indeed in most countries – systematically under-values society, which comprises market and non-market activities. Non-market activities are sometimes free (friends and family, for example), often not (roads, coastguards and primary education cost resources, for example) but inevitably, they are not included when we take stock on an annual basis.

This is not to suggest for a minute that we should scrap GDP and measure happiness instead. This would be to subject public policy to the vagaries of human sentiment, vagaries that only just being understood by behavioural economists and psychologists. Instead of scrapping using dollars and cents to guide our decisions, we should extend the principle to include non-market activities. After all, “priceless” to an accountant means zero. Let’s replace those zeros with numbers.

The related issue with how society divides out its resources is the lack of any connection between how money is raised (in large pools such as VAT, income tax and PRSI) and how money is spent (in large pools such as health, education and social welfare). Thus, when spending cuts have to be made, they are only ever done in reference to the costs of a particular public service, never its benefits.

Changing these resource allocation decisions so that they are based on the return enjoyed by society on money spent – and not just on the amounts spent – is the single biggest challenge for public finances in the OECD over the next generation, in my opinion. There’s no reason Ireland can’t be at the forefront in developing proper accounts for public spending.

The slides I used at the Summer School are available on SlideShare and are embedded below.

What price freedom?

The lecture I gave was the preamble to a panel discussion about economic sovereignty by Richard Boyd Barrett, Paul Murphy (Socialist MEP), IBEC’s Brendan Butler and Pascal Donoghue of Fine Gael. I’ll post my thoughts on that later in the week. To give that post a bit of steer, though, I’ll finish up with a little poll.

Suppose we knew for definite that not giving up some of our economic sovereignty (inter alia, ability to choose tariffs, exchange rates, interest rates or taxes) meant we’d have a lower income than doing so (this is in fact the assumption implicit in any country joining the EU). If average income missing some sovereignty was €40,000, how much of that would you be willing to pay to retrieve that sovereignty back? Zero means you’re not particularly bothered by sovereignty – perhaps things like peace and prosperity are more your bag. At the opposite end, clearly, an answer of 100% means “freedom at all costs”!

What percentage of Ireland's €40,000 average income would you be prepared to concede to have full economic sovereignty (over things like tariffs, exchange rates, taxes, etc)?

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